British gas owner Centrica (LSE: CNA) has been one of the worst performers on the FTSE 100 in recent years. The Centrica share price has fallen by more than 75% in five years, underperforming the FTSE 100 and most of the group’s UK utility rivals.
I admit that I bought my Centrica shares too soon. But I now believe the company has reached a turning point that could leave the shares looking cheap at current levels. I can see three reasons why Centrica could beat the FTSE this year.
Sold: the debt is gone
One of the main reasons for Centrica’s share price slump has been the group’s debt levels. They were too high for comfort and it wasn’t completely clear how the company would cut borrowing.
This problem was solved at one fell swoop last year when the group announced the sale of its US utility business, Direct Energy, for £2.85bn. This deal was completed on 5 January and Centrica has confirmed it’s receiving net proceeds of £2.7bn. Most of this will be used to reduce net debt, which was £2.8bn at the end of last year.
The sale should leave the group with minimal borrowings and a stronger focus on its core UK market. I see this as a good result that makes the stock a more attractive investment.
Energy demand recovery in 2021?
Demand for Centrica’s oil, gas, and electricity fell in 2020 as the pandemic lockdown cut travel and commercial activity. The company says business electricity demand fell by 30% during the second quarter of 2020, for example.
Centrica’s share price slumped along with its profits at the start of last year. But I see this as a temporary problem. I expect to see energy demand recover gradually during the second half of 2021. If I’m right, this should support a recovery in revenue and profits.
The group’s oil and gas business, Spirit Energy, should also benefit. This non-core business could finally attract a buyer, after efforts to sell Spirit were put on hold during the pandemic.
Centrica share price: growing momentum?
Centrica’s latest update indicated that earnings for 2020 would be ahead of expectations. This follows a previous upgrade to broker forecasts in July.
When companies start to beat forecasts after a long period of poor performance, this can signal the start of a new trend. In this case, I think Centrica’s share price could perform well if the firm can demonstrate it’s on a sustainable path to growth and regular dividend payments.
In my view, the firm’s British Gas business has a great opportunity to build on its well-known brand and become an energy services business. Centrica is already moving in this direction and I think there’s more to come.
Right now, Centrica shares trade on just 11 times 2021 forecast earnings, with an expected dividend yield of 3.7%. With debt falling fast and profits on track for a recovery, I think this could look cheap in a year’s time. I plan to hold onto my Centrica stock this year.
Roland Head owns shares of 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.