2019 has bought no respite for investors in energy provider Centrica (LSE: CNA). The shares have been on a consistent downward trend for at least the past five years and any investor who has stayed loyal has been badly burnt – but could that change? I’ll look to answer that question in this article, but first, it’s worth looking into the problems that are depressing the share price.
Why so cheap?
A combination of factors have come together to hit the big energy suppliers hard, but Centrica seems to have been particularly badly affected. The threat of nationalisation, opening up of the market to competition, and a fluctuating oil price have all played their part in battering the share price. Its debt is also not insignificant. Centrica is looking to maintain net debt within its targeted 2018-20 range of £2.7bn to £3.7bn. One way to strengthen its balance sheet would be to sell off some assets, for example, its recent sale of the Clockwork Home Services portfolio in North America for £230m. But would that have an impact on future growth? Quite possibly.
The hammering that the shares have been taking does, on paper, makes them look very cheap, with a P/E of under eight and a dividend yield above 13%. However, just because a share is cheap, doesn’t mean the price won’t keep falling. Trying to catch a falling share is often likened to trying to catch a falling knife – it’s dangerous. The flip side is that if timed right, there could be major upside for any seriously brave investor.
Looking at the 2018 annual report it’s hard to see why the shares should be taking such a hammering. Despite the predominant story being that the ‘Big Six’ energy companies – which include Centrica – are haemorrhaging customers to newer rivals, the numbers don’t seem to back that up. Over the course of a whole year, the company appears to have lost around 250,000 customers. Clearly, that will hit revenues and profits and isn’t a trend investors will be keen to see continue, but it’s hardly a killer blow. For context, it means Centrica still has just over 25m customer accounts.
Looking at the financials, in the year ending 31 December 2018, revenue increased by 6%, indicating the business isn’t on its knees in the way the share price would suggest.
To catch or not to catch?
So the big question is whether it’s worth catching this falling knife? I’d be inclined to wait and see. Fundamentally, Centrica looks to me to be in decent shape, but in the short term, the market can be irrational and further falls in the share price can’t be ruled out, especially as the trend over the last five years has been rapidly down. Longer term, with Centrica’s expansion into connected homes, a recovering oil price, and the power the Big Six energy companies still have in the UK, I’d say the firm can be a winner. It will just take a while to show through in the share price.
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Andy Ross 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.