It has been a tough few months for investors in Centrica (LSE: CNA) (NASDAQOTH: CPYYY.US), as the market cools on energy company stocks. The share price is down 20% in the the last three months, following a recent profits warning. But now I’m wondering whether this is a buying opportunity, especially when I look at the yield, currently a sizzling 5.1%.
It’s amazing the damage a few words from a politician can do. Labour leader Ed Miliband’s pledge to freeze energy prices if he takes power threw utility companies into disarray. It may have briefly pleased the electorate, but investors in Centrica have been voting with their feet. Up to £11 billion of shareholder value has been wiped off the value of energy companies in just two months, according to Liberum Capital. Chairman Sir Roger Carr said that capping prices lacked logic and threatened the financial fabric of energy companies, but his call for an end to “Punch and Judy” arguments about energy prices will go unheeded. Punch and Judy is what our politicians do best.
Punch and Judy show
The end of the pier show looks set to continue to the May 2015 election and beyond, adding an extra wedge of uncertainty for investors. Labour has even talked of splitting up energy companies that both generate energy and supply it to homes and businesses, a call backed by chairman of the House of Commons energy committee, Tory MP Tim Yeo. He said that is the only way to banish the suspicion that firms are profiteering. That makes life even more uncertain. At least recent cuts to green levies should help Centrica hold down prices.
Centrica’s role in the show is to walk a precarious tightrope while jugglng the conflicting demands of politicians, public and shareholders. To add to the pressure, rising demand from emerging markets is pushing prices ever higher, while Centrica also has to invest in new UK infrastructure. At least management has taken the prudent decision to withdraw from another political Punch and Judy show, announcing that it was pulling out of nuclear new build in February.
Life’s a gas
Last year, Centrica benefited from a colder than usual winter, but there is no sign of a repeat. Outside my window, it looks more like September than December. That’s good news for households, bad news for Centrica’s shareholders. The company’s efforts to brave the US residential energy supply market have proved similarly out of kilter, with a drop in the number of accounts lately.
Little has gone right for Centrica lately, so it’s not surprising that it has been hit by a slew of recent broker downgrades. Societe Generale has cut its target price from 410p to 315p, while Deutsche Bank has cut its target from 430p to 315p. Both have downgraded the company to hold. Today, you pay 329p. You’re buying a heap of political uncertainty, but at least you’re only paying 11.9 times earnings. Better still, the yield is on a forecast 5.6% for December 2014. Centrica may have played the role of Judy lately, but it still packs a Punch.