Right now I’m analysing some of the most popular companies in the FTSE 100 to establish if they are attractive long-term buy and forget investments.
Today I’m looking at Centrica (LSE: CNA) (NASDAQOTH: CPYYY.US)
What is the sustainable competitive advantage?
Centrica’s subsidiary, British Gas, supplies gas to around 50% of the UK’s homes. Centrica itself also owns and operates off-shore gas storage facilities, which account for 75% of the UK’s current gas storage capicity.
Furthermore, the company owns seven gas power stations within the UK and is the country’s largest offshore wind farm developer.
Additionally, Centrica owns oil fields within the North Sea and owns Direct Energy, one of North America’s largest energy and energy services providers.
So overall, Centrica is a key part of the UK’s infrastructure, therefore, it would appear that the firm has a huge competitive advantage over its peers and could be the perfect share to ‘buy and forget’.
Moreover, the company’s vertical integration, from oil and gas production to electricity generation and, delivery of electricity and gas to customers means that Centrica has a huge competitive advantage over almost all of its peers.
Indeed, when compared to Centrica’s close peer, SSE it is easy to see how much this vertical integration affects company profits.
In particular, during the past two years, SSE’s operating profit margin was approximately 5% per year. In comparison, Centrica’s operating profit margin stood at 10% for the same period.
Company’s long-term outlook?
Centrica’s long-term outlook looks relatively stable and is only improved by the company’s diversification. In particular, one of the largest threats currently overshadowing utility companies currently is the rising price of oil, which is pushing up costs.
However, Centrica’s oil & gas assets have allowed the company to rule out rising costs from electricity generation, as profits from its oil production side of the business rise.
What’s more, as the UK’s leading off-shore wind farm developer, Centrica is well placed to change with the times and move into renewable energy generation.
As a utility company with dominance over the UK market, Centrica looks to be a great share to buy and forget.
Furthermore, the company’s vertical integration, international operations put the company in a great position to benefit from the rising demand for energy through both the UK and wider global market.
So overall, I rate Centrica as a very good share to buy and forget.
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In the meantime, please stay tuned for my next FTSE 100 verdict
> Rupert does not own any share mentioned in this article.
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