Shares in Centrica (LSE: CNA) (NASDAQOTH: CPYYY.US) have experienced a disappointing year, being down over 8% while the FTSE 100 is currently up around 3% over the same time period. The main reason for Centrica’s poor performance has been political risk resulting from speculation surrounding a potential price freeze of energy prices, should Labour win the next election. However, could Centrica be attractive at current price levels? Moreover, could it even be considered a super growth stock?
Good Value, Bad Growth
Trading on a price to earnings (P/E) ratio of 12.4, Centrica appears to offer good value when compared to the FTSE 100. The wider index currently has a P/E of around 13.5, so Centrica’s poor relative performance in recent months seems to have made it good value on a relative basis.
However, the growth prospects for Centrica’s earnings over the next two years appear limited. For instance, earnings per share (EPS) are forecast to fall from 26.6p in 2013 to 25.1p in 2014. That’s a fall of 5.6% and is partly due to its gas-fired power generation business continuing to lose money. That said, EPS is forecast to pickup in 2015 by 4.9%, although that still means that EPS is expected to be lower in 2015 than it was in 2013.
Post-2015, Centrica may be forced to deal with a price freeze and a tougher regulator (depending on who wins the election), so its growth forecasts after the next two years are very difficult to determine. As a result, Centrica is difficult to justify as a strong growth play.
A Super Income?
However, that doesn’t mean that Centrica is not worth owning. Certainly, there are more attractive growth stocks out there, but Centrica continues to offer a great yield of 5.2% and is forecast to increase dividends per share at an annualised rate of 3.8% over the next two years. It also continues to be a strong defensive play, so that if the stock market were to experience a fall, Centrica’s share price could hold up better than many of its FTSE 100 peers.
Looking Ahead
While Centrica does not make it as a super growth stock, it remains relatively attractive as an income play. Its yield is among the highest in the FTSE 100, its dividend is set to rise and shares appear to offer good value for money. Political risk could hold shares back to a degree, but much of this appears to be priced in, which means that Centrica remains a strong income play.Â