In this article I am looking at why Centrica (LSE: CNA) is a perilous stock selection.
Price to Earnings (P/E) Ratio
As the political heat rises on Centrica and its energy peers to rein in plans for price increases, the earnings outlook across the sector 
has muddied considerably in recent months. Indeed, with the country’s major electricity providers forced into a delicate balancing act of balancing revenues with investment in the nation’s grid, earnings across the sector are expected to come under the cosh in coming years.
Based on current earnings projections, Centrica currently changes hands on a P/E rating of 14.3 for 2014 and 13.2 for 2015. A reading below 15 represents reasonable value for money, while it also smashes a forward average of 21.9 for the entire gas, water and multiutilities industry.
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Price to Earnings to Growth (PEG) Ratio
The pressure to keep tariffs down is expected to result in a 12% earnings drop for Centrica in 2014, although an 8% rebound is anticipated for the following 12-month period.
This year’s anticipated earnings slide results in an invalid PEG rating, although 2015’s slight recovery creates a reading of 1.6. Next year’s multiple falls outside the watermark of 1 or below, which is generally classified as exceptional value, although on the face of it the reading is far from catastrophic.
Market to Book Ratio
Centrica currently boast a book value of £5.36bn, once total liabilities are subtracted from total assets. This leaves the energy giant dealing on a book value per share of £1.04 per share, creating a market to book value of 3.2, some way above bargain terrain of 1 or under.
Dividend Yield
Investors have long flocked to utilities stocks as a form of dependable investment income, and although a worsening political backdrop is predicted to derail earnings growth in the medium term, Centrica is anticipated to keep payouts ticking higher over the next two years.
Indeed, the energy play is expected to push last year’s 17p per share dividend to 17.6p in 2014, and a further advance — to 18.3p — is pencilled in for 2015. These figures create meaty yields of 5.4% and 5.6% correspondingly, taking out a forward average of 3.2% for the FTSE 100 as well as a corresponding yield of 4.3% for the complete gas, water and multiutilities sector.
Worrying Times For The Electricity Sector
Although Centrica’s medium-term earnings ratios are hardly cause to hide behind the sofa, given the ongoing political pressure crimping the entire utilities industry — a situation likely to worsen ahead of next year’s general election — I believe that earnings are likely to remain under the cosh for some time.
Centrica itself downgraded its own earnings forecasts for 2014 earlier this month, and investors should be on guard for similar downgrades from City analysts. With the bottom line expected to come under heightened pressure, Centrica’s strong dividend projections could also experience significant cuts now and in the future.
