Here’s Why Centrica PLC Is A Better Buy Than National Grid plc

Centrica PLC (LON:CNA) is a better bet than National Grid plc (LON:NG), says this Fool.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Centrica (LSE: CNA) and National Grid (LSE: NG) (NYSE: NGG.US) are two of the FTSE 100‘s largest utility companies. However, recent concerns about the government’s plans for Centrica have hit the company’s shares.

Indeed, so far this year, Centrica’s shares have underperformed those of National Grid by 22% and the wider FTSE 100 by 16%. For value investors like me, this underperformance has made Centrica look attractive. 

Valuationng

One of the reasons that Centrica now looks so appealing is the company’s valuation. For example, on an enterprise value/earnings before interest, tax, depreciation and amortization, or EV/EBITDA basis, Centrica trades at a multiple of 9.4. 

A EV/EBITDA multiple of 9.4 actually means that Centrica is trading at a 27% discount to the average of its main peers and a 10% discount to National Grid.

On the other hand, National Grid looks expensive. The company is currently trading at a forward P/E of 16.3, a valuation more akin to a growth share than slow-and-steady utility. Moreover, at its current valuation, National Grid is more expensive than it has been at any point during the past decade. 

There is another reason why Centrica looks cheap at its current valuation. You see, some analysts believe that Centrica’s current valuation implies that the company’s UK retail business is worth nothing. Therefore, if the company were to be broken up, the groups individual parts worth be worth more separately and would attract a higher valuation. 

Growth overseas

When it comes down to overseas growth, National Grid is certainly better positioned than Centrica. In particular, National Grid has put in place plans to expand across the globe, ring-fencing £3.5bn for international investment during 2014.

This investment will be focused around the US market where National Grid plans to develop its infrastructure in order to support long-term growth.

Centrica’s also has plans in place for expansion across the pond but the company’s plans are not as aggressive as those of National Grid. The growth plans are centered around Centrica’s US retail business, Direct Energy, which is trying to expand customer numbers.

Still, Centrica is seeking bolt-on acquisitions around the world to boost its international presence, the most recent of which was Ireland’s state-owned Bord Gáis.

Burning issue

So, Centrica’s valuation is attractive, although National Grid’s international expansion plans are impressive. However, there is one thing that concerns me about National Grid; debt. 

There’s no escaping from it, National Grid’s debt pile is the elephant in the room. At the end of 2013 National Grid’s debt totalled £22bn, or 2.2x shareholder equity. In comparison, Centrica’s net debt at the end of 2013 only amounted to 0.8x shareholder equity. 

National Grid’s debt pile cost the company around £1bn to sustain during 2013. Although £1bn is only around a quarter of net income, when interest rates start to rise, National Grid may have a problem on its hands. With rising interest payments, National Grid’s lofty dividend payout could start to come under pressure.

So all in all, Centrica’s low valuation and the company’s lack of debt makes the company a much better investment than National Grid.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert does not own any share mentioned within this article.

More on Investing Articles

Google office headquarters
Investing Articles

1 reason I like buying S&P 500 shares – and 1 reason I don’t

Will this investor try to improve his potential returns by focusing more on S&P 500 shares instead of British ones?…

Read more »

Young woman holding up three fingers
Investing Articles

3 SIPP mistakes to avoid

Our writer explains a trio of potentially costly errors he tries to avoid making when investing his SIPP, on an…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

Here’s how (and why) I’d start buying shares with £25 a week

Our writer uses his investment experience and current approach to explain how he would start buying shares on a limited…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Here’s my 5-step approach to earning passive income of £500 a month

Christopher Ruane explains the handful of steps he uses to target hundreds of pounds in passive income each month.

Read more »

Investing Articles

2 UK shares I’ve been buying this week

From a value perspective, UK shares look attractive. But two in particular have been attracting Stephen Wright’s attention over the…

Read more »

Investing Articles

A lifelong second income for just £10 a week? Here’s how!

With a simple, structured approach to buying blue-chip dividend shares at attractive prices, our writer's building a second income for…

Read more »

Investing Articles

Here’s how I’d use a £20k Stocks and Shares ISA to help build generational wealth

Discover how our writer would aim to turn a £20k Stocks and Shares ISA into a sizeable nest egg by…

Read more »

Investing Articles

Billionaire Warren Buffett just bought shares of Domino’s Pizza. Should I grab a slice?

Our writer takes a look at a few reasons why Domino's Pizza stock might have appealed to Warren Buffett's Berkshire…

Read more »