When weighing up a potential investment, we always need to look forward rather than backwards. 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 Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US), the FTSE 100 bank. All my figures are courtesy of S&P Capital IQ.
Analysts expect RBS to earn 21p per share in the coming year. This estimate means that, compared to today’s share price of 323p, the market is valuing RBS shares on a forward price-to-earnings multiple of 15. That being said, the experts are far from in agreement — 26 different estimates range from profits of 35p per share to just 11p per share this year.
Looking ahead, the consensus then calls for RBS to earn 32p per share in 2014 before reaching 38p in 2015, a whopping 28% annualised growth. Once again though, the range of the estimates is tremendous, and the most optimistic of analysts reckon RBS shares could even earn 59p by 2015.
These impressive growth expectations highlight the potential for investors willing to take a risk on the speculative factors surrounding RBS. But the sheer range of expectations also possibly highlights the extent to which it’s difficult, if not impossible, to reasonably estimate the bank’s earning power. If even the experts are completely divided on RBS’s earnings potential, is it really possible to value the business?
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> Mark does not own any shares in this article.
