Things have been looking up for shareholders in Centrica (LSE: CNA), the owner of British Gas. The Centrica share price has soared over the past year. Yesterday, it hit a new year high close to 66p, having grown 50% in a year.
Below I consider why the Centrica share price has been rising – and whether I think it can keep climbing.
Low expectations
Shareholders in Centrica such as myself have become used to a litany of disappointments. From falling dividends to shedding customers, the company has disappointed shareholders for years. Even after the recent increase, the Centrica share price is still two thirds below its level of five years ago.
A lot of Centrica shareholders thus have fairly low expectations when it comes to the company’s performance. Set against this, the past year has been quite impressive. The company applied disposal proceeds towards reducing debt. Net debt fell from £3bn at the interim point last year to £93m a year later. That is a massive improvement of the Centrica balance sheet.
That wasn’t the only good news in the interim results. The company turned a loss per share last year of 5.9p to profit of 12.8p per share in the same period this year. With those earnings per share in a six-month period, it is not surprising that the Centrica share price has been recovering. Even now, though, it continues to trade as a penny share.
Is there hidden value in the Centrica share price?
After the increase in the Centrica share price, is there room for further growth?
I think the answer is yes. The shares are still priced for poor performance. Currently, the Centrica market capitalisation is £3.9bn. If the full-year results are broadly in line with the company’s performance in its first half, that suggests a prospective price-to-earnings ratio in the low to mid-single digits.
Historically one of the attractions of Centrica was its dividend. For now that is suspended. But if profits keep rolling in and the balance sheet remains strong, I see no reason for them to remain suspended. While it may not happen in the near term, the prospect of the Centrica dividend returning could also lead to an uptick in the firm’s share price.
Centrica share price risks
So, even though the shares have performed strongly lately, I continue to see substantial upside potential for them. I reckon the Centrica share price could keep appreciating over the winter.
One thing I’ve learned as a Centrica shareholder, though, is that the company is always able to disappoint even when it has a strong hand of cards. Risks include the impact of volatile energy prices, which could hurt profitability in the company’s trading division. Another risk is continued customer losses, which could hurt revenues. I’m holding onto my Centrica position for now, but I won’t be adding to it in the absence of clear evidence of a long-term turnaround in the company’s fortunes.
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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