Two value stocks currently on my radar are Centrica (LSE: CNA) and Associated British Foods (LSE: ABF).
Let’s dig deeper to help me decide if I should buy or avoid the shares.
Centrica
British Gas owner Centrica has enjoyed a great spell in recent times, largely due to higher costs of gas.
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The shares have fallen 28% over a 12-month period. At this time last year, they were trading for 163p, compared to 117p at present.
The shares look cheap on a price-to-earnings ratio of close to six. For context, the FTSE 100 average index is closer to 12.
Due to stellar performance, Centrica has significantly strengthened its balance sheet, which could help it deal with future volatility, as well as renewable energy initiatives.
However, it seems the purple patch is over. Half-year results released in July showed profit levels nearly halved to just over £1bn, compared to the same period last year. Market conditions have somewhat normalised.
The cyclical nature of stocks like Centrica is a risk. They can be great when things go their way, like when gas prices shoot up. However, when things aren’t going well in the macroeconomy, there can be a risk that earnings and returns could take a hit. Plus, competition in the market is more intense than ever.
Nevertheless, it’s hard to ignore Centrica’s dominant market position, as it serves close to 10m customers. Plus, a dividend yield of 3.5% sweetens the investment case. However, I do understand dividends are never guaranteed.
Overall, I don’t think Centrica shares are an obvious opportunity for me. I wouldn’t rush to buy any shares today, purely because I’d like to see what happens next in the gas price saga, linked to economic and geopolitical turbulence.
Associated British Foods
Associated British Foods operates in a defensive sector through its foodstuffs segment. Plus, it has huge growth in the retail side of things through its burgeoning Primark brand, which can’t be ignored.
The shares are up 3% over a 12-month period, from 2,097p at this time last year, to current levels of 2,177p.
Using a different metric to value the shares, they trade on a price-to-earnings growth (PEG) ratio of 0.5. Any reading below one indicates value for money.
I personally believe a lot of the firm’s future prospects hang massively on how well Primark does. However, it’s worth noting that the fashion and retail market is extremely competitive, as well as the fact it involves razor thin margins at times too. I’ll keep an eye on this as earnings and returns could be impacted.
However, Primark’s popularity seems to be growing, and performance seems to be consistently doing the same. So much so that the business is aggressively expanding into the US and Europe. This is an exciting development that could catapult earnings and the shares upwards.
Finally, a dividend yield of 3% helps the investment case.
Of the two stocks, ABF looks like a great opportunity to buy cheap shares at present, with a view to them growing nicely for years to come. I’d buy some shares when I next can.
