I noticed that the Centrica (LSE: CNA) share price has been on an excellent run in recent months. Let’s take a closer look at whether or not the soaring shares could represent an opportunity.
Centrica share price rallies
In the face of macroeconomic issues, including soaring inflation and rising interest rates that have hampered markets, Centrica is one of a few shares to have bucked recent trends.
As I write, Centrica shares are trading for 157p. At this time last year, they were trading for 72p, which is a mammoth 118% rise over a 12-month period!
I believe the Centrica share price has been on such a good run due to excellent performance. This has been underpinned by the rising cost of gas and the money it is making from its residential business. After all, it is one of the biggest gas and electricity businesses in the UK, serving millions of customers, and everyone needs power and heat.
Opportunity or one to avoid?
I’m always a bit dubious of cyclical stocks and want to dig a bit deeper than usual. Centrica has benefited from the recent energy market but will that last forever?
Centrica looks in good shape due to its exceptional performance of late. Aside from its excellent market position and profile, its most recent performance demonstrates my point. In the first half, earnings per share rose from 11p to 25.8p. This was underpinned by a £6.5bn profit, compared to a £1.1bn loss in the same period last year. In addition to this, the business has solidified its balance sheet. It now has £3bn of cash in the coffers, compared to £3bn in debt at the same time last year. No wonder the Centrica share price has been on the up!
Finally, Centrica shares would boost my passive income with a dividend yield of just over 2%. This could rise if the firm’s impressive performance continues. However, I understand that dividends are never guaranteed. In addition to this, the shares look good value for money on a price-to-earnings ratio of just three.
From a bearish perspective, my biggest issue with Centrica is if the market normalizes. This is a risk with all cyclical stocks. If energy prices were to fall, could performance, the shares, and payouts also fall? There is a chance of this, in my opinion.
Another issue Centrica has to contend with is the fact it’s at the mercy of external factors. At present, the geopolitical issues in Ukraine and Russia have caused energy prices to spike. Could a similar event cause them to drop and, in turn, negatively impact Centrica and its investment viability? This uncertainty is off-putting for me personally.
My verdict
To conclude, there is a lot to like about Centrica. I can’t ignore the exceptional performance of the Centrica share price in recent months. An enticing valuation, passive income opportunity, and solid balance sheet make a good case for me buying the shares.
However, I’m uneasy about the cyclical nature of Centrica’s business. For me, too many external factors can impact the business and the shares. For now, I’m going to keep Centrica shares on my watch list. I may revisit my position when full-year results are available.
