I’m going to come straight out and say it: I think the share price of Centrica (LSE: CNA) will remain in the doldrums. A new CEO coming in 2020 may have better luck than the hapless Iain Conn in restoring the owner of British Gas to health, but the challenges facing the energy supplier are formidable.
So despite the shares falling for many years now and currently lying at around a 22-year low, I see little reason to try to catch this falling knife as the prospects of a turnaround are still limited. The share price performance over the past 12 months illustrates just how little faith investors have in the prospects for Centrica as the shares have slumped by 53%. And that follows on from years of previous declines. All in all, the situation is pretty bleak.
Light at the end of the tunnel?
I think metaphorically speaking Centrica is still stuck in a very dark tunnel. The hopes pinned on smart home devices haven’t materialised into commercial success. The aim of £1bn revenue by 2022 isn’t going to be achieved and the company now aspires to get just a fifth of that amount. Its customers continue to leave, which chips away at profits year-on-year and the measures being taken to counter that such as slashing the dividend, cutting staff numbers and selling off parts of the business, are not sustainable long term.
To show just how bad things are, the company lost 742,000 of its household energy customers last year, although the figures from the year before were even worse as 2017 saw about double that amount heading for the exits.
On top of all these challenges, which will not be solved any time soon, there’s the massive debt of £2.7bn, which is a legacy of Centrica’s massive investment in oil exploration in the years before the price of that commodity fell. All the issues with the company mean I don’t believe that the share price is likely to recover in the near term.
A better option
A more profitable way to make money from a utility, I think, is to buy FTSE 250 company Telecom Plus (LSE: TEP). The share price over the last 12 months is up 12% and has been much higher than that. I think this far better performance is because investors are more excited about the future opportunities for the firm.
Back in June, the final results for the year ended 31 March showed profit before tax came in at £43m, 4.9% higher than the year before, as revenue increased by 1.5% to £804.4m. The company also pointed out it was able to sell more services to more of its customers, which is good for profitability. It said over 26% of its customers now use it for their energy, broadband and mobile services.
During the year, the utilities provider added 4% more customers — a rate of growth far in excess of previous years. Continued success in finding new customers and selling them more is a great combination for future revenue and profit increases and so I’d be far more inclined to buy Telecom Plus than embattled industry peer Centrica.
Yes Telecom Plus is more expensive with a P/E of around 20, but I think given its growth potential, that’s potentially a price worth paying as there’s still plenty of market share for the company to take.
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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.