MENU

Why I’d dump Centrica plc for this turnaround stock

British Gas owner, Centrica (LSE: CNA), has been a dog of an investment with the share price down around 57% over the last four years, with the stock still seemingly locked in a downtrend.

The firm is restructuring, yet again, and moving further towards its customer-facing operations of supplying gas, electricity and associated services. The directors plan to reallocate £1.5bn of resources from asset businesses to customer-facing businesses by 2020. But the market is fierce with competition from smaller energy suppliers warming up, presenting the average gas and electricity consumer with more and more choice, which is easily accessible through price comparison websites.

Difficult trading

However, it seems clear that the company needs to do something because net cash flow from operating activities plunged almost 19% in the half-year to June, compared to the figure a year previously. Meanwhile, the whole energy sector faces political noises about tightening regulation, while the warm autumn weather we’ve seen in Britain will be driving Centrica’s management accounting department to hurl its previously drawn up cash flow projections into the bin.

The firm is making some progress reducing debt but it’s also in a state of operational and strategic flux at the moment. It’s difficult to predict what shape it will emerge at the other end of the restructuring period and whether the business will be worth holding shares in. Maybe that’s why the share price is still sinking, and whatever the valuation or level of dividend yield on offer, I’m not willing to plunge in to buy any of Centrica’s shares yet.

I’d rather focus on the emerging recovery story at battered aerospace and engineering firm Cobham (LSE: COB).

The fall in earnings could be over

After five years of shrinking earnings, the firm’s fortunes could be set to improve during 2018, and City analysts following the firm predict a lift in earnings per share of around 14%. Unlike Centrica, Cobham’s share price looks steady and isn’t falling anymore. Such base building could signal that better times are on the way for the share price, and I’m looking out for the next trading update – due during November.

Back in August, within the half-year report chief executive David Lockwood told us that the firm is “working hard to build the foundations for our future success, but we are in the early stages of implementing a challenging turnaround…”  He reassured us that Cobham operates several high-quality businesses with differentiated technologies and leading positions in attractive markets.

An ‘off-the-peg’ recovery plan

There’s nothing unusual in the directors’ plan for recovery. It’s all about getting the basics right by focusing on costs, customer service, leadership, control and execution – the staples of just about every successful business turnaround. Lockwood reckons the company is making progress “across a number of areas” but warns that executing all the required steps will be “time-consuming and may encounter some turbulence along the way.” 

Nevertheless, the firm delivered results in line with expectations during the first half of the year with operating profit of £89.9m, down 12% or so, compared to the year before. If you think Cobham can recover, it could be a good time to look at the investment opportunity right now.


Mistakes can be costly

I want more evidence that Centrica can turn itself around before investing in its shares, but buying too early is one of many common investing mistakes we can make.The Motley Fool's experts have published a FREE report called The Worst Mistakes Investors Make, which identifies other common wealth-destroying practices to avoid.This free guide won't cost you a penny (so won't add to the problem) but could save you hundreds or thousands of pounds. To get your copy, CLICK HERE.

Kevin Godbold 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.