Can You Really Trust City Forecasts For HSBC Holdings plc, GlaxoSmithKline plc and Vodafone Group plc?

Can City estimates for HSBC Holdings plc (LON: HSBA), GlaxoSmithKline plc (LON: GSK) and Vodafone Group plc (LON: VOD) be trusted?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

HSBC (LSE: HSBA), GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) and Vodafone (LSE: VOD) (NASDAQ: VOD.US) all look to be to be attractively priced based on City forecasts for the next two years. The problem is, City analysts can — and do — often get these forecasts wrong, which can sometimes leave investors in a sticky position.

Indeed, over the past year alone City analysts have reduced their earnings forecast figures for HSBC, Glaxo and Vodafone by a double-digit percentage. This leaves me wondering if there could be further reductions to come. 

Revising lower

cityHSBC, Glaxo and Vodafone are three FTSE 100 behemoths. Most investors will have at least one of these stalwarts in their portfolios. As all three companies currently support a dividend yield in excess of 4.5%, compared to the FTSE 100 average of less than 3.5%, they make a dependable backbone to build a portfolio around.

Still, investors should be careful, as the City has been reducing its earnings forecasts for these companies over the past year, which has pushed valuations higher.

Vodafone has been the most affected by these ‘moving forecasts’. This time last year the City was expecting Vodafone to report earnings per share of 29p during 2014, followed by earnings of 32p per share during 2015. These forecasts included Vodafone’s share of Verizon Wireless‘s income.

Excluding the Verizon Wireless income, and the share consolidation, the City was expecting Vodafone to report earnings per share of 9p during 2014 and then 10p during 2015. However, over the past few months these estimates have fallen further and the City now expects Vodafone to report earnings of  just 6.8p per share this year and 7.2p during 2015. 

Continual adjustment

Surprisingly, over the past year, Glaxo has seen its earnings forecasts adjusted lower by a shocking 34%! The City now expects the company to report earnings of 96p per share this year — this time last year earnings of 118p per share were expected. Similarly, 2015 forecasts have fallen from 130p per share down to 101p per share. 

HSBC has also seen its earnings forecasts revised lower, although the adjustment has only been less severe. For 2014, City analysts have adjusted the bank’s earnings lower from 62p per share, down to 54p per share. Further, 2015 earnings estimates have been downgraded by 10p, from 68p per share, to 58p per share. 

What does it mean?

How does it affect investors? Well, for a start falling earnings estimates have changed company valuations. Unfortunately, this could mean that investors see valuations change for the worse as analysts revise forecasts down further. 

However, dividend investors do not need to worry. In most cases City dividend forecasts are correct, as they are based on figures supplied by company management teams.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves owns shares of GlaxoSmithKline. The Motley Fool recommends GlaxoSmithKline.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »