While the cost-of-living crisis in the United Kingdom is causing a lot of chaos, it’s working wonders for Centrica Plc (LSE:CNA) shares. In fact, the stock up almost 20% in the last 12 months thanks to surging earnings.
Does that mean now is the time to buy these shares for my portfolio? Or should I be moving towards the sell button? Let’s explore.
What does Centrica do?
Headquartered in Windsor, Centrica is an international energy service and solutions company. It has operations across two continents. And with a skilled workforce of more than 20,000 employees, the business aims to provide affordable and sustainable living solutions to over 10 million customers.
While the name Centrica is lesser-known, its numerous brands are common among British households.
- British Gas (Local Heroes, Dyno, PH Jones)
- Bord Gáis Energy (Hive)
- Centrica Business Solutions
- Centrica Energy Trading
- Upstream (Centrica Storage, Spirit Energy)
Performance of Centrica shares
At today’s share price, Centrica has a market capitalisation of around £4.2bn. Despite the rising popularity today, historically, the stock hasn’t exactly been a stellar performer for shareholders. In fact, in the last ten years, Centrica shares have tumbled by almost 80%!
Is the latest upward momentum the start of a long-awaited comeback?
The company’s stock started at 46.6p in early 20221. It enjoyed a steady stream of positive momentum throughout the year as pandemic woes wore off. Come December, and shares were trading at around 71.5p representing a 53% gain in just 12 months. That’s hardly something to scoff at.
With energy bills surging and demand for electricity remaining strong, the business is enjoying some significant tailwinds in 2022.
However, the bullish trend started showing weakness in September when the stock fell by almost 18%. The sudden pessimism seems to be primarily linked with the new British government’s “mini-budget” rather than an internal problem.
With economists predicting higher inflation and, in turn, interest rates on the back of the newly introduced tax cuts, the Centrica share price took a bit of a beating. Nevertheless, they’re still in the green compared to a year ago.
How do the financials look?
Unsurprisingly the latest financial results were solid. After all, when electricity price rise, so does Centrica’s bottom line.
Profit margin expansion, paired with further operational improvements, continues to paint this business as the industry leader. Management has been focusing on stabilising its operations and balance sheet for a while now. And it’s encouraging to see some progress being made.
The net cash position now stands at £316m over the first six months of 2022 versus a net debt position of £93m in mid-2021. With this improved liquidity, it finally re-instated its progressive dividend policy after being suspended when the pandemic began.
And with reasonable targets for earnings-per-share (EPS) to dividend-per-share (DPS) coverage at two times, the new dividend payouts should be sustainable, providing no other spanners are thrown into the works.
In my opinion, the worst seems to be behind it, and Centrica shares could be on the verge of enjoying a long overdue period of growth.
What are the analyst price forecasts?
Given there remains plenty of uncertainty surrounding this business and the energy market in general, it’s not surprising to see that not all investment analysts have the same opinion on Centrica shares.
Overall, there seems to be a positive tone surrounding the potential future performance of this business. The average target price forecast of 118p per share. That’s roughly 70% higher than where Centrica stock is trading today.
But like I said, not everyone is convinced, especially with the risk of more aggressive interest rate hikes on the rise. Bearish broker forecasts are predicting the stock could go as low as 50p in the next 12 months, wiping out another 25% from Centrica’s market capitalisation.
Should I buy Centrica shares?
I think it’s definitely worth commending Centrica for hitting its performance milestones this year.
The operational improvements paired with a stronger balance sheet are definitely a breath of fresh air for investors compared to historical performance. The same goes for the reintroduction of shareholder dividends.
Having said that, I’m not tempted to add Centrica shares to my portfolio today. Management’s poor track record of prudent capital allocation doesn’t exactly entice me.
Furthermore, an investment in the energy sector is fraught with risk, especially considering the company has little to no control over the price of its product in the ongoing energy crisis.
Therefore, I won’t be adding any Centrica shares to my personal portfolio today. But I will be keeping close tabs on how it handles the looming uncertainties within its industry.
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Saima Naveed does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned. Views expressed on the companies and assets mentioned in this article are those of the writer and, therefore, may differ from the opinions of analysts in The Money Cog Premium services.