Are Centrica shares one of the best buys in the FTSE 100 right now?

Centrica shares have rallied 27% in 2023 after the British Gas owner tripled its adjusted operating profits, but can they continue to soar?

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Centrica (LSE:CNA) shares have outperformed the FTSE 100 index by a considerable margin this year to date. The UK’s leading retail energy supplier shrugged off headwinds posed by the government’s windfall tax, posting mammoth profits for FY22 as wholesale gas prices surged.

So, will the Centrica share price continue to rise in 2023? Or do environmental pressures and energy market volatility cloud the long-term growth outlook for the British Gas owner?

Here’s my take.

Record profits

Recent financial results suggest there are plenty of reasons to be bullish on the company’s prospects. The firm’s adjusted operating profit for FY22 grabbed the headlines at £3.3bn, up from £948m in the previous year. That was 23% higher than the consensus forecast.

But the good news doesn’t end there. Last year, Centrica reinstated its progressive dividend policy and delivered a full-year dividend of 3p per share for investors.

However, it’s worth noting that the business failed to pay dividends in 2020 and 2021, so this isn’t the most reliable FTSE 100 stock for passive income seekers.

Nonetheless, the company is taking full advantage of rising energy prices. It’s adding value for shareholders with an additional £300m share buyback tranche on top of its existing £250m programme.

In addition, it has eradicated the £4bn adjusted net debt mountain that was on the balance sheet just three years ago. By the end of 2022, Centrica had amassed £1.2bn in adjusted net cash.

Risk and reward

Efforts to decarbonise the UK’s energy supply over the long term are perhaps the biggest threat to Centrica’s business. It remains highly dependent on natural gas for its revenue, although the business also owns a 20% interest in Britain’s operational nuclear power generation fleet.

Hydrogen projects for domestic heating form part of the company’s plans for the transition towards net zero, but it faces difficulties in this regard. Manufacturing hydrogen is currently an energy-intensive process and the firm will have to rely on technological advances to ensure it has a business model that’s fit for the future. In short, there’s still a long way to go.

A further risk is energy market volatility. Commodity prices have soared since Russia invaded Ukraine, which has boosted the Centrica share price. However, there’s no guarantee prices will stay at sky-high levels. Indeed, it’s worth noting the company suffered a 90% decline in adjusted earnings per share from 2013 to 2020 when commodity prices were falling.

That said, the valuation looks attractive. A price-to-earnings ratio of around 3.4 is a low multiple. Provided the business can effectively manage the challenges it faces, I think there’s plenty of room for Centrica shares to continue their upward trajectory from today’s price of just below 117p.

Should I buy?

Centrica’s exposure to volatile markets and climate-related headwinds give me reasons to be cautious. Accordingly, I wouldn’t want my portfolio to be too concentrated in the stock.

Nonetheless, it’s hard to deny the company has delivered some excellent recent results and there’s a compelling argument to be made that it’s undervalued at present.

If I had spare cash, I think Centrica is a Footsie stock that deserves a place in my diversified portfolio.

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.

Charlie Carman 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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