Right now I’m looking at some of the most popular companies in the FTSE 100 to try and establish whether or not they have the potential to return to historic highs.
Today I’m looking at Centrica (LSE: CNA) (NASDAQOTH: CPYYY.US) to ascertain if its share price can return to 402p.
Initial catalyst
As usual, before we can establish if Centrica’s shares will return to their all-time high of 402p, we need to establish what caused them to hit this level in the first place.
It would appear that Centrica’s shares were driven to 402p earlier this year by strong demand for defensive stocks by investors. Indeed, around the time that Centrica’s shares hit this level, shares of peer, SSE were also near their all-time high.
But can Centrica return to its former glory?
Unfortunately, at 402p, Centrica’s shares appeared expensive. In particular, at 402p per share, Centrica was trading at a historic P/E of 15.5, far above the multiutilities sector average of 11.2.
That being said, as one of the UK’s premier utility companies, Centrica does deserve somewhat of a premium over its peers. Still, a near 40% premium does seem slightly excessive.
Centrica’s recent decline has been driven by speculation that the government will start to cap, or freeze utility bills, which will put pressure on the firm’s profits. However, I feel that Centrica is extremely well placed to ride out excessive regulation in the sector if its goes ahead.
You see, far from being a plain old utility provider, Centrica is an oil & gas producer as well, with ownership of oil-bearing assets around the world. This indicates to me that Centrica will be able to use profits from its oil operations to support is domestic UK business if stringent regulations come into force. What’s more, the company has access to a number of gas fields, which allows it to control the amount it pays for wholesale fuel to some extent.
This diversification, along with the company’s £500m share buyback, should boost earnings and drive the company’s share price higher in the long-term. Furthermore, the UK will always need utility providers and any short-term speed bumps should be mitigated by long-term profitability.
Foolish summary
Overall, Centrica’s shares are well placed to stage a return to 402p. Recent declines brought about by investors concern over government regulation are only likely to impact the company in the short-term. Moreover, in the long-term, Centrica’s oil & gas assets should keep the profits flowing.
So all in all, I feel that Centrica can return to 402p.
