The Centrica (LSE: CNA) share price has been charging higher this year. Year-to-date, the stock is up around 17%. The FTSE All-Share Index has returned just 8% over the same period.
Over the past 12 months, the utility supplier has achieved an even better performance, adding nearly 40%. The index has returned just 21%, excluding dividends, over the same time frame.
While past performance should never be used as a guide to future potential, I think the stock’s recent gains tell a story. The market’s view of the business has changed as it progresses with its turnaround plans.
And with that in mind, I’ve been reviewing Centrica shares to see if it could be worth adding the stock to my portfolio as a recovery play.
Centrica share price outlook
Over the past few years, I tried to stay away from Centrica. The British Gas owner has struggled to fight off competition and keep costs low. Unfortunately, it has also suffered from a misguided diversification plan.
For example, the group’s expansion into oil and gas production with a business called Spirit Energy only served to distract management from the company’s real problems.
The current management is trying to rectify these issues. It’s forecasting £100m in cost savings this year. The sale of another business, Direct Energy, has also freed up cash to reduce debt. Net debt at the end of the first quarter was down to £0.5bn, from £3bn after the sale of Direct Energy.
The company seems to be moving in the right direction, and this is having a positive impact on the Centrica share price. However, it’s clear to me the group still has a long way to go.
Challenges ahead
After recent asset sales, British Gas is now the group’s largest division, making up about half of revenue and 63% of underlying operating profit last year.
Unfortunately, British Gas made underlying operating profits of £281m in the company’s last financial year, down from £304m in the previous. As a result, overall group underlying profit declined 31%.
These declines illustrate the challenges the company’s facing. Customers are finding better deals elsewhere. What’s more, Centrica is currently caught up in a bitter fight with its staff. Earlier this year, the group sacked hundreds of its engineers through a controversial fire-and-rehire scheme to help reduce costs. This aggressive tactic hasn’t helped the group’s reputation
Considering all of the above, even though the Centrica share price has outperformed the market recently, I wouldn’t buy the stock. I think the business still has a lot of work to do before claiming its recovery is complete. In the meantime, competitors may continue to take market share. This could depress profits and revenues further, which could have a negative impact on the stock price.
I think there are plenty of other companies out there with brighter prospects.
