Shares in British Gas owner Centrica (LSE: CNA) have plunged in value over the past 12 months, slumping more than 40%, excluding dividends, since the end of February 2019. After these declines, there’s no denying the stock looks cheap. It’s currently dealing at a price of 76p, compared to 157p two years ago.
However, while the stock might look a bargain on a price basis, from a fundamental perspective, Centrica doesn’t look particularly appealing.
Last time I covered the company, I noted that while it looked cheap, we would have to wait for further updates from the business to confirm whether or not its recovery had taken hold.
Unfortunately, recent trading updates from Centrica show the company is struggling. In its annual results, published at the beginning of February, the firm posted a £1.1bn pre-tax loss.
A £476m writedown in the value of its oil and gas production assets, coupled with a £372m impairment of its 20% stake in the UK’s eight operational nuclear power plants, were responsible for the bulk of the losses.
In addition, the company is suffering from the energy price cap. Revenues across the group declined 3% overall to £22.7bn. Excluding one-off charges, earnings fell 35%.
This is all bad news for investors. Centrica has been trying to re-invent itself and return to growth for many years now. Most of these attempts have disappointed. Dividend cuts and asset sales have all failed to stabilise earnings, and the stock price has continued to plunge.
Price vs value
Looking at these results, while Centrica might seem cheap from a price perspective, the stock doesn’t appear to be that attractive, considering its fundamentals.
Indeed, shares in the utility provider are dealing at a forward price-to-earnings (P/E) ratio of 9.2. That seems about right for a company that has seen revenues decline at a compound annual rate of 1.8% for the past six years. What’s more, the firm has lost money in three out of the last six years.
Moreover, it appears as if Centrica’s market-beating 6.7% dividend yield is also on shaky ground. As earnings have declined, dividend cover has slipped to just 1.6 times. Meanwhile, the group’s debt has ballooned. Centrica now carries £3.8bn of debt, giving a net debt to equity ratio of 313%.
As such, while the Centrica share price now looks attractive after recent declines, the company’s shaky fundamentals could mean further declines could be on the cards.
Centrica is facing some severe challenges, including falling customer numbers, rising costs and high levels of borrowing. These pressures are unlikely to go away any time soon, and the company will have to take some drastic action if it wants to reignite growth.
Another dividend cut could be on the cards as management tries to stabilise the business, pay down debt, and deploy capital towards new growth initiatives. Therefore, it would be best to avoid the Centrica share price for the time being.
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Rupert Hargreaves 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.