On a P/E ratio of 6, is the Centrica share price a bargain?
Looking at its price-to-earnings (P/E) ratio of 6, Centrica (LSE: CNA) may seem cheap. On top of that, at the current Centrica share price, the British Gas owner yields 3.1% — not a massive dividend but still decent in my view.
Even better, at its interim results point, the FTSE 100 firm was sitting on a net cash pile of £3.2bn.
So, while it has a market capitalisation of £6.9bn, when discounting for that cash pile, the market is basically assigning it a value of under £4bn.
Could this be the sort of bargain I want to add to my portfolio?
Big brand, big cash generation potential
British Gas certainly has its problems.
Repeated examples of terrible customer service have battered the company’s reputation over the years. Meanwhile, the long-term demand picture for gas looks bleak. Gas usage in the UK has been in decline for many years and looks set to continue on that trajectory.
But while demand may be falling, it is still substantial. British Gas (alongside other brands Centrica owns) is well-known even if it is not widely loved. That gives Centrica pricing power.
Meanwhile, the business has an energy trading business that means its fortunes are not necessarily tied to ongoing demand for gas in the British Isles.
As the net cash position shows (Centrica was indebted just a few years back), this is a company that is able to generate sizeable amounts of cash. I think that could continue to be the case.
Hard to assess whether this is actually a bargain
Despite that, I have no plans to add Centrica shares to my portfolio even if the current price may look like a bargain.
A postponed plan to ban the sale of new gas boilers may extend the lifetime of domestic gas usage in the UK. But the long-term trend is clear: Centrica’s core business could shrivel away over time.
I also am concerned by the risks posed by changes in energy prices, especially for the trading division. While Centrica made a post-tax profit of £3.9bn last year, the prior 12 months had seen a £0.8bn loss. That sort of volatility in earnings can make me uncomfortable.
Given that sort of volatility, it is not clear to me whether the low P/E ratio represents the sort of bargain it may initially seem to.
Why I’m not investing
Stripping it back to basics, I remain unconvinced about the long-term potential for Centrica’s business.
It has strengths, including a customer base that remains large even if it was much smaller than it once was. But the demand outlook is bleak and in the long term I see real risks to Centrica’s current business model.
So I have no plans to put my money into buying Centrica shares for my portfolio.
The post On a P/E ratio of 6, is the Centrica share price a bargain? appeared first on The Motley Fool UK.
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C Ruane 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.
