It has been a positive few months for shareholders in Centrica (LSE: CNA). The share price has been rising and now stands around 43% higher than a year ago, at the time of writing this article earlier today. But that’s far below where it was even a couple of years ago.
At around 67p, leaving penny share territory may still look some way off. So do I think Centrica could be trading for £1 at some point in the next year?
Positive business momentum
The main thing I think the company has going for it right now is an improving business outlook compared to recent years. Paying off most of its debt has made its balance sheet look more robust. It also gives the company a sharper focus, which could boost operating performance. A consolidating UK gas supply market could boost the size of the company’s retail customer base after sustained declines.
Against that, I’m not impressed by the quality of the company’s management. Basic missteps such as getting into a public spat with its own engineers over employment conditions don’t inspire confidence in me. In the end, that might not matter for the Centrica share price though. It has fallen a long way over the past few years, so even signs of a modest but sustained business recovery could help it move up in my view.
The Centrica share price at £1?
Getting to £1 may take some time. But I think it’s possible, if there’s good news in the coming year.
Centrica has struggled with earnings over the past several years. But back in 2017, it reported almost 6p per share in earnings. Since then, the business has changed shape. The debt paydown was enabled by asset sales, which will likely reduce the company’s future earnings capability. Nonetheless, it’s possible that earnings will get back into positive territory in the coming year. If so, that could well lead investors to look at the company’s earning potential, based in part on its track record.
I’m not just plucking the £1 potential target out of the air. Centrica started last year within 10% of a £1 share price. To get back to that price, I think it could be enough for the company to regain more investor confidence by showing its earnings are moving closer to where they used to be.
Centrica share price risks
I could be wrong, of course. A challenge with Centrica is that it has long struggled to run a consistently strong business. In its interim results, for example, the company warned that a remaining legacy gas contract in its marketing and trading division is expected to make a full-year operating loss of perhaps as much as £100m. It doesn’t take many bad pieces of news like that to make a company’s economics look much less attractive.
There are other risks here too. Uncertain gas prices could play havoc with the company’s projected returns. Looking forward, changing energy regulations could lead to significant declines in gas demand. That could hurt both revenues and profits for Centrica.
So while I do think Centrica could hit £1 in the next year on improved business performance and investor sentiment, I won’t be increasing my position any time soon.
Christopher Ruane owns shares in Centrica. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
This post was originally published on Motley Fool
