LONDON -- When weighing up a potential investment, we always need to look forward rather than backward.
If you buy a stake in a business, it's the future profits that count -- and the stock market will value your shares based on future expectations.
With that in mind, it can be helpful to review what expert City analysts are expecting a company to earn in the coming years. These expectations can then be compared to the share price to give you a better idea of how the stock market is valuing the business.
Today, I'm looking at the earnings per share forecasts for AstraZeneca (AZN -0.93%) (AZN -0.29%), the FTSE 100 pharmaceutical giant. All my figures are courtesy of S&P Capital IQ.
Analysts expect AstraZeneca's profits to be 3.34 pounds per share this year. This estimate means that, compared to today's share price of 3,296 pence, the market is valuing AstraZeneca's shares on a forward price-to-earnings multiple of 9.8.
Looking ahead, the consensus then calls for a further decline in AstraZeneca's earnings to 3.19 pounds per share for 2014, before slipping to 3.15 pounds in 2015. The data also indicates that AstraZeneca's revenues might shrink by almost 7% a year over the same time period, from $30 billion to around $24.7 billion.
These damp expectations explain why AstraZeneca's shares appear to trade on such a lowly valuation. But with a new management team in place, could the company find a way to revive its pipeline of new treatments, or is AstraZeneca cheap for a reason?
Of course, whether these questions, the City's profit projections, and the current valuation make the shares of AstraZeneca a buy, hold, or sell is for you to decide.
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