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 Rio Tinto (LSE: RIO) (NYSE: RIO.US), the FTSE 100 mining giant. All my figures are courtesy of S&P Capital IQ.
Analysts expect Rio Tinto to earn £3.51 per share in the coming year. This estimate means that, compared to today’s share price of 2,838p, the market is valuing Rio’s shares on a forward price-to-earnings multiple of 8.
Looking ahead, the consensus then calls for Rio Tinto’s earnings to reach to 405p per share in 2014 before climbing to 428 pence in 2015, 9% annualised growth. Rio’s revenues might grow more slowly at 6% per year over the same time period according to the estimates, from $51bn to around $61bn.
The market’s valuation and the estimates seem to offer up something of a paradox — the big players think that strong growth could be on the cards for Rio, and yet the shares are priced for no growth. So, has the market gotten carried away with its blanket pessimism toward the mining sector, or are the experts mistaken on Rio Tinto’s growth potential?
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> Mark does not own any shares in this article.
