The Centrica share price: FTSE 100 bargain or value trap?

The Centrica share price has been a poor FTSE 100 investment in the past. But that could be about to change, says Rupert Hargreaves.

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The Centrica (LSE: CNA) share price has been a challenging FTSE 100 investment to own over the past few years. The British Gas owner has struggled to retain customers in the viciously competitive UK utility market. It’s also lost money from overseas ventures and its energy generation business.

These headwinds have hurt the company’s profitability and weighed on its share price. Over the past decade, the group has lost 80% of its market value and 3m customers. 

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However, over the past 12 months, under the guidance of a new management team, the company has embarked on a transition programme. It has sold off non-core assets and used the funds received to reduce debt. Management is also planning to increase its role in the transition to green energy and boost investment in its connected homes business.

Unfortunately, I think it’s unlikely these efforts will lead to an immediate turnaround. Nevertheless, it’s clear to me the company has changed direction, which could be a big positive for the Centrica share price. 

FTSE 100 investment 

In a recent interview, the energy giant’s boss admitted the business wasn’t particularly well organised. He outlined excess layers of bureaucracy in a complex corporate structure as the key factors holding back its return to growth.

In the past, Centrica’s spending on consultants has averaged £1m a week. It also has 80 different contracts with its employees. These are just two of the complications the new boss wants to eradicate of over the next few years. 

If the strategy works, I think the Centrica share price could be undervalued at current levels. As well as streamlining its business model, the company wants to invest in its connected home business. This allows consumers and businesses to streamline their energy use. I think this kind of technology will become increasingly in demand as the world transitions towards a lower carbon future. 

Centrica is also investing in green energy technology. It’s looking into turning the UK’s largest natural gas storage unit into a carbon capture facility. Once again, I think these initiatives will help the company succeed in the green energy future. 

Centrica share price risks

Centrica has plenty of opportunities ahead of it, but I think there are also lots of risks to consider as well.  Management’s efforts to change employment contracts has lead to worker disputes.

What’s more, while the business is trying to develop its green ambitions, it still owns a share of an oil and gas joint venture. This has been up for sale for some time with no buyers emerging. The organisation could face high costs as it tries to exit this business. 

Other headwinds such as the government’s energy price cap and regulatory demands may also hurt profitability. 

As such, while I am optimistic about the outlook for the Centrica share price, I’m not a buyer of the stock today. I think the company needs to prove it’s well on the way to recovery before I buy. That could take some time.

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Rupert Hargreaves has no position in any of the shares mentioned. 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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