LONDON -- When weighing up a potential investment, we 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 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 (EPS) forecasts for British American Tobacco (BATS 0.47%) (BTI 0.51%), the FTSE 100 cigarette-manufacturing colossus. All my figures are courtesy of S&P Capital IQ.
Analysts expect British American's profits to be 2.29 pounds per share this year. This means that, compared to today's share price of 35.67 pounds, the market is valuing the company's shares on a forward price-to-earnings multiple of 15.5.
Investors love the stability offered by big tobacco companies, and this is reflected in a fairly tight range of the experts' EPS forecasts for BAT. In fact, there's only a 23 pence difference between the highest and lowest analyst estimate for British American's earnings per share this year.
Looking ahead, the consensus calls for an improvement in British American's earnings to 2.50 pounds per share for 2014, and then 2.76 pounds in 2015. The data suggests BAT's revenues may grind higher over the same time period, too, from 15 billion pounds today to over 17 billion pounds by 2015.
It's easy to see why investors are attracted by the economics of the tobacco industry, and with BAT's shares up 32% in the last two years, returns have been smoking-hot, too. But are British American's shares still attractive at today's prices, or will their strong performance finally run out of puff?
Whether these projections, and the current valuation, make the shares of British American Tobacco "fairly priced" is for you to decide.
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