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The Centrica share price has fallen 86% in a year. Should I buy the stock?

Rupert Hargreaves
·3-min read
Risk reward ratio / risk management concept
Risk reward ratio / risk management concept

The Centrica (LSE: CNA) share price has fallen 86% over the past 12 months. Following this performance, the stock looks cheap from a price per share perspective. Shares in the British Gas owner are changing hands at around 50p, down from a high of approximately £2.40 in 2016.

Centrica share price decline

Just because a stock looks cheap, doesn’t mean it is cheap. Indeed, Centrica has been selling off assets over the past five years. This has had an impact on profitability. The company’s operating profit crumbled from £2.5bn in 2016 to a loss of £849m for 2019.

Current analyst estimates suggest the business will report a slight recovery in 2020. Analysts have pencilled in a potential net profit of £283m for Centrica’s 2020 financial year, that’s up from a loss of £1bn in 2019.

These figures for 2020 are only estimates at this stage. However, the company has said it expects adjusted earnings to be ahead of market expectations. So, this seems to suggest management is expecting to report income exceeding current City expectations for 2020.

Nevertheless, the decline from 2016 to 2019 tells me the business is shrinking. This implies the company deserves a lower valuation today than it did in 2016. On that basis, it seems to me that at least some of the recent decline in the Centrica share price can be attributed to shrinking group profits.

Optimistic note

The latest trading updates from the company, have struck a more optimistic note. In the second week of January, Centrica reported customer numbers remained broadly unchanged in the second half of 2020.

The update also stated the firm expects to report a substantial decrease in debt this year. Management is planning to use the proceeds from the sale of the group’s Direct Energy division, which closed at the beginning of January, to reduce outstanding liabilities. According to its trading statement, this £2.7bn cash infusion will strengthen the organisation’s balance sheet and reduce pension obligations.

I think these are all positive noises from the group. After around five years of mediocre performance, the company’s most recent market updates suggest it’s starting to turn a corner.

However, I think there could be further challenges ahead for the business. The renewable energy transition will be a tremendous test for the energy industry. What’s more, British Gas is now just one of a range of companies available to consumers. The business has to stay on its toes to maintain its customer base.

Therefore, while it looks as if the organisation has made progress over the past 12 months in dealing with legacy issues, I think there could be further challenges ahead for the group. Nothing is guaranteed for British Gas and the Centrica share price. Both in the short and long term, the company may face further challenges, although there may be opportunities along the way as well.

The post The Centrica share price has fallen 86% in a year. Should I buy the stock? appeared first on The Motley Fool UK.

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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2021