FTSE 100-listed Centrica (LSE: CNA) has taken a beating in the equity markets. The energy provider’s share price has been mainly in freefall since late February when it announced a pessimistic outlook for 2019. I can imagine this makes any investors in this share nervous, and indeed there is reason to be. But I don’t think that’s all that there is to the story. In fact, there are some weighty positives worth considering too.
But the big question is whether the positives outweigh the negatives. Let’s find out.
Financial weakness fuels share price fall
First the downside. The share price might have gone into a tailspin, but it has been on the slide for years. Consider this. At its present levels, the share price is down by over 40% from its long-term average. In fact, its five-year trend-line is clearly tilting towards the bottom. While at any other time, this might be a good time to buy the shares of a quality company, with both its earnings and cash-flow are likely to take a hit in 2019, it’s far from being a screaming buy.
And this is hardly all that makes me uncomfortable about Centrica. As my colleague Paul Summers recently pointed out, the high dividend isn’t covered by profits, it’s losing customers to smaller companies and its big payouts to senior management don’t sit well in these times.
Getting back on track
I do like the fact that it does have a few corrective measures up its sleeve, however. It’s in the process of streamlining its business, which is presently spread out across multiple interests, including supply of gas and electricity to homes and business, supply of new energy solutions, power generation and production and processing of oil and gas. This has involved hiving off its North American business of supplying gas and electricity to homes, an announcement that came hand in hand with the diminished financial outlook in February. This suggests that the company was quick on its feet to react, which is a definite positive. More recently, it announced job cuts to get back on track.
Robust past performance
Also, let’s not forget the company’s past performance. Both group revenues and operating profits grew in 2018. The share price hasn’t reacted to the better performance, most likely on account of the outlook, but a long-term growth investor would, I believe want to consider the share for purely this reason.
Clarity in uncertainty
I think it’s also worthwhile to consider whether the price is declining because investors no longer have faith in the company share or because it’s still too expensive. I reckon it’s a bit of both. Some investors are likely to be put off by speculated dividend cuts. For others, it’s the price, since the share is trading at a trailing price-to-earnings ratio of almost 33x, which is way higher than that for any other company among its peers. As a long-term growth-focused investor, I would not buy it now, but I would keep Centrica on my radar, and buy at least a few shares as soon as it becomes more affordable.
