Today I am outlining why Centrica (LSE: CNA) could be considered a perilous stock for growth hunters.
Earnings volatility in the pipeline
Centrica has been one of the utilities sector’s poorest performers during the past year, the share price having surrendered more than a fifth over the past year due to rising questions over the firm’s future profitability.
The firm saw earnings to stagnate in 2013 at 26.6p per share, and City analysts expect performance to worsen further in the current year as pressure at its downstream divisions bite. Indeed, the business is anticipated to experience a 20% dive, to 21.2p, although a 12% bounceback to 23.7p is pencilled in for 2015, helped by expectations of falling wholesale costs.
At current prices some would argue that these growth projections create decent value for money. Despite this year’s expected slide the energy giant trades on a P/E multiple of 15.1 times predicted earnings, just above the benchmark of 15 which illustrates attractive reasonable value for money. And 2015’s robust improvement drives this still lower, to 13.5.
Problems spread far and wide
But for many, the spectre of a worsening trading environment threatens to put the pressure on Centrica’s earnings potential in coming years. The company — like the rest of the ‘Big Six’ energy providers — is under close scrutiny from the Competition and Markets Authority (CMA) over profiteering and faces growing to be broken up.
Against this backcloth Centrica is undertaking a charm offensive to calm the rhetoric ahead of next year’s general election, and is holding off on initiating fresh price hikes at its British Gas subsidiary, in turn smacking revenue growth. Indeed, the company expects the average customer bill to be £90 lower this year from 2013 levels.
But the political problems facing Centrica are not just confined to these shores. Indeed, the effect of heavy sanctions on Russia due to its involvement in Ukraine threatens to scupper a deal the British firm made with Gazprom in 2012 to supply 2.4 billion cubic metres of gas from October. Although the Russian firm is yet to be hit by trade restrictions, the escalating crisis in Eastern Europe could force potential action and give Centrica a supply headache and weigh on the cost base.
Meanwhile the energy play also faces a number of other problems which could derail an earnings resurgence from next year, from the threat of a prolonged blackout at some ofEDF Energy’s British nuclear stations — in which Centrica hold a 20% interest — through to questions over the economic viability of renewable energy in the UK. I believe that Centrica is not a stock selection for the faint of heart.
