As the Centrica share price soars, should I buy?

The Centrica share price has grown over 50% in a year. Christopher Ruane considers whether he ought to buy more for his ISA.

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Saucepan on a gas hob

Image source: Getty Images.

Gas is in high demand at this time of year – and so are shares in British Gas owner Centrica (LSE: CNA). The Centrica share price hit an end-of-year high in last week’s trading. It was over 50% higher than a it had been year before.

Despite that, the shares sit well below their historic highs. Even after last week’s increase, Centrica shares are changing hands for less than a third of what they cost five years ago. So, is this an opportunity to add more Centrica shares to my ISA?

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Why the Centrica share price is rising

First, I think it is helpful to consider the reasons behind the share price increase that started in early August.

The obvious one has been the increase in gas prices during the period. Given how central gas is to Centrica’s business, that could be good for its performance. For example, it may be able to generate higher profits from its existing residential and business gas customer base.

Yet I think rising gas prices are a mixed blessing for Centrica. It has a trading business that could see larger losses if the energy market is highly volatile. If residential customers sees its prices as expensive, they could go elsewhere. It has already been shedding customers for quite a few years.

But I see the main reason driving the share price rise as increased investor confidence in the company after a long period of underperformance. The past several years have seen it streamline its operations, unload some businesses and focus on its core operations. With the right asset mix and management focus, hopefully it will be able to move away from its track record of big swings in results. I think that optimism is reflected in the rising share price.

What will happen next?

I reckon Centrica has an attractive set of assets. In the past year it has slashed its debt close to zero. Even after the share price rise, the company’s market capitalisation is only £4.2bn. If it can convert its large installed user base into sustainable profits that price could still undervalue it.

But I remain wary. Centrica has a long history of disappointing shareholders, including me. Dividends remain suspended. Current management has made some missteps in my view, such as its handling of labour relations. That suggests to me there is the possibility of further poor judgement in future.

Meanwhile, risks remain for the company, including continued volatility in energy markets. While that could turn out well for Centrica’s profits, it could also turn out badly. Until the preliminary results are published in February, it will be hard to get a real sense of how the business has been performing recently.

My next move

My Centrica position still shows a loss even after the share price rise. I am holding it for now in the hope of further price appreciation. But I won’t be adding any more Centrica to my ISA. Until I see evidence of a sustained, structural improvement in its business performance, I remain wary of Centrica’s proven ability to deliver unwelcome surprises to shareholders.

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Christopher Ruane owns shares in 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.

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