In December, I picked British Gas owner Centrica (LSE: CNA) as my top stock for 2022. Its shares have outperformed the market so far this year, but have pulled back from the 90p-high seen in May.
However, market conditions have changed dramatically since I picked this FTSE utility stock in December. Is it still a good time for me to buy Centrica shares, or has the investment outlook changed?
50% profit boost
When I chose Centrica late last year, I had no idea what lay ahead in 2022. Although energy prices were already rising by the end of 2021, the war in Ukraine has changed the picture.
The surge in energy prices we’ve seen since the Russian invasion means British Gas is facing some higher costs and an increased risk of customer bad debt.
However, British Gas routinely buys hedging contracts for much of its electricity and gas needs, so it hasn’t yet been fully exposed to the rise in wholesale prices.
At the same time, Centrica’s position as a major North Sea oil and gas producer means it’s been able to sell this production at much higher prices, boosting profits.
On balance, I think it’s fair to say Centrica is profiting from higher energy prices. City analysts who cover the stock seem to agree. They’ve jacked up their 2022 earnings estimates by nearly 50% since January.
Are Centrica shares getting cheaper?
City profit forecasts have risen much faster than Centrica’s share price. This means that, on some measures, Centrica shares look cheaper today than they did at the start of the year.
Back in January, the stock was trading on a 2022 forecast price/earnings ratio of 10. Today, Centrica trades on just 7.4 times 2022 forecast earnings.
Are Centrica shares too cheap to ignore? There are some risks. Although I think a windfall tax on utilities is unlikely, I still need to consider the possibility that energy prices will fall to more normal levels over the next year.
British Gas might also struggle to hedge future energy supplies at such attractive prices. That could put pressure on profit margins next year.
The big picture tells me to buy
Centrica has been going through a slow turnaround over the last few years. That’s now pretty much complete. The company has raised around £3bn by selling its US utility operations and its North Sea oil assets.
Here in the UK, British Gas has been investing in improved technology and staffing to provide better customer service without extra costs.
The group’s net debt has also been reduced to minimal levels and management believes that future earnings should be more stable and predictable than in the recent past.
Against this backdrop, I think Centrica’s profits are likely to keep climbing for the next couple of years, even if energy prices fall to more normal levels. I’m also confident that the 4.4% dividend yield should be safe — and keep rising — for the foreseeable future.
I see good value in Centrica shares at around 75p. I’d be very comfortable buying the stock for my portfolio today.