On a P/E ratio of 6, is the Centrica share price a bargain?

The Centrica price-to-earnings ratio is in the mid-single digits. This writer weighs some pros and cons of adding the share to his portfolio.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Looking at its price-to-earnings (P/E) ratio of 6, Centrica (LSE: CNA) may seem cheap. On top of that, at the current Centrica share price, the British Gas owner yields 3.1% — not a massive dividend but still decent in my view.

Even better, at its interim results point, the FTSE 100 firm was sitting on a net cash pile of £3.2bn.

So, while it has a market capitalisation of £6.9bn, when discounting for that cash pile, the market is basically assigning it a value of under £4bn.

Should you invest £1,000 in Tesla right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Tesla made the list?

See the 6 stocks

Could this be the sort of bargain I want to add to my portfolio?

Big brand, big cash generation potential

British Gas certainly has its problems.

Repeated examples of terrible customer service have battered the company’s reputation over the years. Meanwhile, the long-term demand picture for gas looks bleak. Gas usage in the UK has been in decline for many years and looks set to continue on that trajectory.

But while demand may be falling, it is still substantial. British Gas (alongside other brands Centrica owns) is well-known even if it is not widely loved. That gives Centrica pricing power.

Meanwhile, the business has an energy trading business that means its fortunes are not necessarily tied to ongoing demand for gas in the British Isles.

As the net cash position shows (Centrica was indebted just a few years back), this is a company that is able to generate sizeable amounts of cash. I think that could continue to be the case.

Hard to assess whether this is actually a bargain

Despite that, I have no plans to add Centrica shares to my portfolio even if the current price may look like a bargain.

A postponed plan to ban the sale of new gas boilers may extend the lifetime of domestic gas usage in the UK. But the long-term trend is clear: Centrica’s core business could shrivel away over time.

Created with Highcharts 11.4.3Centrica Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

I also am concerned by the risks posed by changes in energy prices, especially for the trading division. While Centrica made a post-tax profit of £3.9bn last year, the prior 12 months had seen a £0.8bn loss. That sort of volatility in earnings can make me uncomfortable.

Given that sort of volatility, it is not clear to me whether the low P/E ratio represents the sort of bargain it may initially seem to.

Why I’m not investing

Stripping it back to basics, I remain unconvinced about the long-term potential for Centrica’s business.

It has strengths, including a customer base that remains large even if it was much smaller than it once was. But the demand outlook is bleak and in the long term I see real risks to Centrica’s current business model.

So I have no plans to put my money into buying Centrica shares for my portfolio.

Of course, there are plenty of other passive income opportunities to explore. And these may be even more lucrative:

We think earning passive income has never been easier

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

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.

C Ruane 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.

More on Investing Articles

Investing Articles

Wow! IAG shares are undervalued by 47%, according to analysts

IAG shares have surged over the past 18 months, but analysts are pointing to more growth. Dr James Fox takes…

Read more »

Investing Articles

2 cheap FTSE 100 and FTSE 250 shares to consider for an ISA before 5 April!

These FTSE 100 and FTSE 250 shares are on sale today! Here's why long-term Stocks and Shares ISA investors should…

Read more »

Investing Articles

How I’m building a new second income for 2035

Millions of us invest for a second income. Here are the steps Dr James Fox is taking in order to…

Read more »

Investing Articles

At a 52-week low but forecast to rise 73%! Is this growth share the FTSE’s top recovery play? 

This FTSE 100 growth share has taken an absolute beating over the past two years but Harvey Jones says the…

Read more »

Investing Articles

This FTSE 250 share offers a juicy 9.8% yield. Will it last?

This well-known FTSE 250 share has a percentage dividend yield approaching double digits. Should Christopher Ruane add the income share…

Read more »

Investing Articles

Is a £333,000 portfolio enough to retire and live off passive income?

A third of a million pounds can generate a serious amount of passive income, but relying on this sum alone…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

Here’s why Nvidia stock fell 13% in March

The Nvidia stock price rise was looking unstoppable. Should investors now be wondering if the same might be true of…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing For Beginners

Why FTSE 100 investors should pay attention to ‘Liberation Day’

Jon Smith explains why the upcoming tariff announcement from across the pond could have an impact on the FTSE 100,…

Read more »