Why this dirt-cheap FTSE 100 stock could outperform in a recession

This FTSE 100 energy company is as cheap as chips and should continue to take market share from its competitors as the UK enters a recession.

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As recession looms here in the UK, it seems I have few places to hide as an investor. While many panic as news gets worse, I remind myself that time in the market beats timing the market. Therefore, I will continue to invest in good quality companies as their share prices become increasingly attractive. With this in mind, one FTSE 100 stock that has caught my eye recently is Centrica (LSE: CNA). This integrated energy company has been taking over competitors and streamlining its business. The stock has risen 18% year to date and should remain strong in the face of the current economic turmoil.

Boring is better

In times of market madness, the most boring stocks often outperform. Centrica has certainly proved that. The company is simple to understand – it supplies energy services to homes and businesses in the UK (mainly through British Gas) and Ireland (through Bord Gais Energy). This accounts for the majority of the company’s revenue.

On top of this, the company owns Hive, a technology solutions business that sells energy appliances such as electric vehicle charging ports. Centrica is also involved in renewable energy projects (solar farms). Both of these segments account for a smaller portion of total revenue.

Over the past year, there has been severe disruption in the energy supply industry. Several companies have filed for bankruptcy as oil and gas prices soar, squeezing their profit margins. Centrica’s ability to survive through this period shows its resilience, which should benefit the company in the medium term.

The company has benefitted from this market weakness, taking on the customers of bankrupt energy supplier People’s Energy and acquiring Nabuh in recent years. This has increased its market share in the UK. Centrica is also actively disposing of exploration assets to pay down debt and strengthen its balance sheet.

Cash is king

Analysts have predicted the company will remain cash flow positive over the next two years. It currently has a 12-month forward free cash flow yield of 14%. Valued at a five times price-to-earnings ratio, the company is at its lowest valuation ever — even cheaper than 2008, at the peak of the great financial crisis.

One significant risk to the business is the recent windfall taxes mentioned by many politicians, as this would reduce net profits for Centrica. However, with several companies filing for bankruptcy in the energy services industry, I believe a windfall tax would be counterproductive. Further bankruptcies could lead to monopoly status for the few survivors (Centrica is likely to be one of them), creating further price pressure as the survivors control the market.

Overall, Centrica operates in a staple industry, is gaining market share, and improving its balance sheet. It’s currently priced at a very low valuation, meaning any positive news is likely to boost the share price and is a great addition to my portfolio for the uncertainty that lies ahead.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter McMullan 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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