The Centrica (LSE: CNA) share price has been a pretty terrible investment to own over the past five years. Excluding dividends paid to investors over this period, the stock has returned -68%.
Over the same time frame, the FTSE All-Share Index has added 6.5%. These numbers imply the stock has underperformed the wider index by nearly 75% over the past half-decade. In fact, most shareholders would have been better off putting their money in a bank savings account than investing in the business.
However, over the past 12 months, the company’s fortunes have started to improve. Centrica has managed to shake off some of the legacy issues that have held back its growth in the past. This transformation, coupled with rising oil and gas prices, has helped improve investor sentiment towards the company.
Over the past 12 months, the Centrica share price has returned nearly 50%, excluding dividends, compared to a return of just 10% for the FTSE All-Share Index. I think this trend could continue.
This is why I am considering adding the stock to my portfolio.
The Centrica share price comeback
Over the past five years, Centrica has struggled to compete in a viciously competitive energy market. The company, which owns the British Gas brand, was burdened with legacy employment contracts and high costs.
These restricted its ability to compete with more nimble peers such as Octopus energy, which has built its operating business around technology, a model designed for the 21st century.
As gas prices have exploded over the past 12 months, many of British Gas’s smaller competitors have gone to the wall. The volatile energy environment exposed cracks in their business models, and they could not deal with the uncertainty.
However, Centrica and British Gas now have the advantage as the largest supplier in the market, with established supply contracts and economies of scale.
Historically, the corporation has been able to earn higher profit margins than its competitors, thanks to these strategic advantages. As such, the current environment plays to the company’s strengths. The business has a second chance to entice consumers back to the brand.
Despite this opportunity, the company’s potential is still limited by the energy price cap. This cap is currently set at £1,277 a year for an average customer, although Ofgem will revise it in April. Some analysts have speculated it could hit £2,000 a year, although the government and energy businesses are working to find a solution to reduce the burden on consumers.
Growth opportunity
In this environment, I think Centrica, with its economies of scale and trusted British Gas brand as well as diversification into products such as financial services, will prosper. Earnings are expected to rise by around 100% in 2022. Based on this growth, I think there is potential for the stock to more than double from current levels over the next year.
Unfortunately, this growth is far from guaranteed. The price cap and volatile energy prices are the biggest challenges the company faces. These could weigh on its ability to grow over the next few years.
Still, despite these risks, I think the Centrica share price has tremendous potential over the next few years. That is why I would buy the stock for my portfolio today.
