The Centrica (LSE: CNA) share price, which was at a high of over 400p less than five years ago, has since been in a long slump. Earlier this month, it crashed through 100p, and closed on Friday at 93.48p — a level not seen since last century.
Is the owner of British Gas now the biggest value trap in the FTSE 100, or could it be the biggest bargain?
Every stock has its price
Centrica’s a stock that’s managed to make a fool of me. I first tagged it as one to avoid over three years ago, noting its history of major lurches in management and strategic direction. It seemed to be a company that nobody could make work for shareholders on a sustainable basis.
The share price was 215p at the time, and with it currently under 100p, how has it made a fool of me? Well, a couple of times, I’ve relented in my bearishness. They say “every stock has its price,” and in an article in March, when the shares were trading at 116p, I thought the price was sufficiently low, and the outlook sufficiently improved, to see value in buying the stock.
On the outlook-sufficiently-improved front, the company had reported a dramatic fall in the loss of consumer accounts in the second half of 2018. We’d also seen a spate of smaller energy suppliers go bust. A new regulatory cap on default tariffs, which was introduced in January, wasn’t great for suppliers generally, but I felt the bigger players would prove relatively resilient.
On the price-sufficiently-low front, I reckoned City analysts’ earnings forecasts of 9.8p a share for 2019 (P/E of 11.8), followed by 20% growth to 11.8p in 2020 (P/E of 9.8), made the stock simply too cheap. And while I felt the company’s 12p dividend (running yield of 10.3%) might have to be rebased, a hefty cut already appeared to be priced in.
Even cheaper now
In a trading update last week, Centrica said external factors — default tariff cap, warm weather, and falling gas prices — had presented challenges during the first four months of the year.
City analysts’ earnings forecasts have now come down to 8.8p a share for 2019, followed by 10.8p for 2020. However, the share price has fallen by a much greater magnitude than the earnings downgrades. This means we’re looking at a P/E of 10.6 on this year’s forecasts, falling to just 8.7 on next year’s.
Therefore, the stock is even cheaper now than when I saw value in it in March, albeit a slashing of the 12p dividend looks more likely than ever (I reckon a cut of at least 50% is on the cards). At the same time, I think the fall in Centrica’s market valuation has made it a plausible acquisition target. As part of a larger company — freed from the credit rating and dividend pressures of a UK-listed utility — the business could have attractive growth prospects.
Value but not income
A top value pick, or a miserable value trap? I think it’s a tough call. On balance, I’m personally leaning towards seeing Centrica as a value ‘buy’ at the current level. I wouldn’t be buying it for income, though.