Energy giant Centrica (LSE: CNA) has had a pretty disappointing year in the market. Since January, the Centrica share price has fallen 9.1%, leaving many investors scratching their heads. As renewables and sustainability grow in importance, is this the moment to leap in and snap up a bargain, or are we looking at a classic value trap? Let’s dive in.
A mixed bag
The shares are trading a long way from their 52-week high of 173.70p. With a price-to-earnings (P/E) ratio of just 6.1 times, plenty of value investors will be lighting up at the potential here. However, it’s a complex time in the energy sector. Many of the traditional players are having to totally re-invent, with disruption from newer, more dynamic firms always on the horizon.
Here’s where Centrica might have an edge. The company has been making significant strides in the renewable energy space. It’s walking the walk with investments in solar, battery storage, and energy efficiency services.
This pivot towards greener pastures could explain why, despite the share price dip, 13 out of 15 analysts are still waving the ‘buy’ flag. They seem to believe the firm is well-positioned to ride the renewable energy wave that’s sweeping across the sector.
What’s next?
There’s a lot to be excited about for the future here. Centrica’s sitting on £3.2bn in adjusted net cash. That’s a war chest that could fund some serious growth moves or acquisitions over the coming years.
Then there’s the recent performance. Although the share price itself hasn’t exactly got investors cheering, earnings per share (EPS) from the latest report didn’t just beat estimates, it smashed them by 8%. And let’s not forget the £200m share buyback program and a dividend yield of 3.11%.
However, I’ve got plenty of concerns too. Annual earnings are expected to shrink by about 12.3% over the next three years. This is far from ideal for attracting investors as many other sectors are seeing tremendous growth and sustained demand.
Profit margins have taken a hit too, tumbling from 14.1% last year to a more modest 5.4%. And let’s not forget the 10.2% share price plunge after the latest results.
The firm’s dividend track record has been pretty volatile in the last few years too. Although the payout ratio of 20% suggests there is plenty of room for movement, we’re a long way down from the lofty 15.8% dividend seen in 2019.
More of the same
I think the Centrica share price has another mixed few years ahead. On one hand, we’ve got a cash-rich company with a fairly cheap valuation, and a cheering squad of analysts. On the other, we’re looking at shrinking earnings, squeezed margins, and an erratic dividend history.
So could the shares bounce back quickly to an all-time high? Absolutely. The low P/E and analyst optimism suggest there’s plenty of room for the share price to heat up. But remember, the energy sector can be unpredictable, and regulatory changes could throw a spanner in the works at any moment.
For me, I want to invest in companies where I can clearly see a path to growth, and as much as there is potential here, I think there’s too much uncertainty ahead. I’ll be keeping it on my watchlist for now.
This post was originally published on Motley Fool
