Things have been looking up in recent years at energy company Centrica (LSE: CNA). The company has sharpened its strategic focus, boasts an improved balance sheet and has become profitable again after several loss-making years. Today it announced a share buyback programme, highlighting that the company is producing surplus cash. The Centrica share price moved up in early trading this morning and is now 31% higher than it was a year ago.
As a long-term investor, though, do I have the opportunity to buy the shares now in the hope of even stronger results in years to come?
Unpredictable industry
I have my doubts.
Cleaning up its balance sheet made Centrica more attractive to me as an investor as it is no longer burdened by the billions of pounds in debt it previously had. But the underlying business performance has been helped by strong energy prices recently.
Energy prices are unpredictable though – and outside Centrica’s control. That is one of the things I do not like about the business. Its large installed customer base means it ought to have long-term sources of revenue, but profits are far harder to predict. In the long term, if energy prices fall a lot, that could hurt Centrica’s profitability badly.
On top of that it is heavily exposed to the UK gas market as the owner of brands including British Gas. UK government figures suggest that gas demand has fallen 23% in the past two decades. I expect gas use to fall further in the UK in the coming decade due to political pressure.
Solid business performance
Set against that, Centrica has quite a bit going for it.
As well as gas it does have other businesses, such as electricity supply. Its energy trading business could also do well in future – people will still need energy, even if the sources are different to today.
The company had 10.2m customers at the end of June. That number actually grew 1% compared to the same point in the prior year. Although Centrica has been shedding customers over the long term, its large installed base and strong brands could help it make profits for years or even decades to come.
Last year the company was profitable, but at the interim point this year it recorded an £864m loss. Centrica said the loss was due to “the high commodity price environment”, which adds to my concerns about the risk energy price volatility poses to the firm’s profits.
The share price does not attract me
Centrica has some attractive features. But I do not like the long-term outlook for gas demand and find the company’s inconsistent performance a concern. I do not see its valuation as a bargain.
Buying back shares is a vote of management confidence in the company’s cash generation. But the move would have been more beneficial if it had acted a couple of years ago when the share price was less than half what it is today. Meanwhile, the dividend remains a fraction of what it was up to 2018.
I would rather invest in a company with a consistently profitable business model and resilient long-term market demand. So the current share price does not tempt me to buy into the business.
