Today I am looking assessing whether electricity giant Centrica (LSE: CNA) (NASDAQOTH: CPYYY.US) is in decent shape to record plump earnings growth in 2014.
Earnings expected to hot up in 2014
British electricity stocks have taken a bashing in recent months, as the spectre of profits-whacking legislation has whacked market appetite. Sparked by Labour leader Ed Miliband’s call for multi-year energy price freezes from 2015 back in September, speculation over the introduction of a variety of other measures, ranging from excess profits taxes right through to nationalisation, have been doing the rounds.
And Centrica’s decision to hike average prices across its British Gas subsidiary by 9.2% in October — which the firm attributed largely to rising wholesale prices and the impact of green levies — added fuel to the fire. The firm’s decision this week to cut the average bill by £50 this week, however, following the government’s decision to slash levies on household bills, has sapped some of the heat out of the issue, however.
I have long argued that the potential for any radical action which could curb long-term profitability for Centrica and its peers remains hugely unlikely. Utilities firms need to remain popular for investors in order to keep the power grid up and running, given the huge capital expenditure required to keep infrastructure up to date, and politicians cannot afford to play chicken in such a high-stakes game. As in previous cases, I expect the current furore to peter out as we enter 2014, a situation which could boost the share price again.
Still, Centrica faces a number of uncertainties which could affect earnings now and in the future, from the effect of rising wholesale prices on the bottom line through to the extent of cold weather in coming months and thus demand for electricity and gas.
However, the company continues to make excellent strategic progress in expanding into new geographies and securing new energy sources, a situation which should boost earnings from next year and beyond. While the customer base at British Gas remains resilient despite recent bad publicity, Centrica is also making huge inroads in the US retail market, and expects to double profits at its Direct Energy subsidiary here by 2018.
In line with Centrica’s interims this month, which advised that the group “expects to deliver 2013 adjusted earnings per share at similar levels to 2012,” brokers anticipate earnings to remain stable on-year at around 27.1p per share. But for 2014, the City’s number crunchers expect earnings per share to resume their upward path once more, rising 5% to 28.3p.
