Things have been looking up for shareholders in Centrica (LSE: CNA) lately. The Centrica share price has increased by 50% in under four months, and by the same amount over the past year.
Today it hit a new high for the past year. Should I add to the existing position in my portfolio?
Why is the Centrica share price soaring?
I see two main reasons for the British Gas owner’s shares to have been heating up so fast.
One is external and the other pertains more directly to the company. The external factor is swings in pricing in the energy markets. Gas prices have moved around a lot lately, which a lot of investors presume is good for the company’s revenues and profitability. I think the reality is a bit more complex. Centrica doesn’t just sell gas, it buys it too. So while fluctuations in gas prices can help it, they also can pose a risk to its profits.
The second reason I see for the sharp rise in the Centrica share price is a reassessment by investors of its business prospects. While recent performance has been encouraging, longer term Centrica has been a rubbish share for me to hold. It has lost 66% of its value over five years and the once juicy dividend has been suspended. The company has shown some signs of getting into healthier shape once more, such as slashing the debt on its balance sheet. I think that has led many investors to question whether Centrica really still merits its low valuation. It may have problems as a company — customer losses and staff relations among them — but it remains a substantial business which if well run could potentially generate strong cash flows.
Unpredictable performance
With those winds behind it, I reckon the Centrica share price could continue to improve from here. If its full-year results in February affirm the positive trends seen at the interim level, I think that could lead to a positive rerating of the share valuation. In the months leading up to the results, as anticipation builds, so may the share price.
But Centrica shareholders such as myself have been burnt by the company disappointing investors on multiple occasions before. Is this time different? It could be — the company has reshaped itself, has a new strategy, is carrying less debt and could benefit from increased gas prices. But it certainly isn’t assured — management missteps including staff relations problems make me wonder how good the current Centrica leadership really is. Longstanding risks like a declining domestic customer base for British Gas remain a concern and there is a risk that the gas market overall will see growing curbs leading to lower revenues and profits in future.
My next move on the Centrica share price
Although I think the share price could increase further from today’s year high, I will not be buying any more Centrica shares for my portfolio at the moment. I remain wary of the company’s proven ability to disappoint shareholders even when things look good.
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.
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