Why is this value share getting even cheaper?

Our writer reviews a UK value share that has a very cheap-looking valuation. Does it offer long-term value for his portfolio?

| 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.

Businesswoman calculating finances in an office

Image source: Getty Images

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.

Different investors have their own way of deciding what constitutes a value share.

Many look at price-to-earnings (P/E) ratios. They can be helpful, but in isolation they do not always tell the full story.

For example, earnings can move around dramatically from one year to the next. A P/E ratio does not reflect how much debt is on the balance sheet, but in the end it is crippling debt that leads some very cheap-seeming shares to lose all their value.

Should you invest £1,000 in Aj Bell right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Aj Bell made the list?

See the 6 stocks

With a P/E ratio of under four, energy provider Centrica (LSE: CNA) certainly looks cheap. The share price has actually been falling and now stands 20% below where it was in September.

Why?

Inconsistent earnings

The problem here is not the balance sheet.

Centrica used to have a lot of debt. But asset sales in recent years have transformed its finances as well as its business.

At the end of last year, the company had net cash of £2.7bn. That gives it a considerable financial buffer. The current market capitalisation is £7.1bn, so the net cash is close to 40% of that.

What about earnings? Here, things look less compelling in my view.

Last year’s earnings of £4bn were huge. Basically, the cost of buying the whole company right now is just a few hundred million pounds more than what it earned last year, combined with its net cash.

But, as is common with value shares, Centrica’s earnings have moved around dramatically. It has only recorded a profit after tax in two of the past five years.

The asset sales I mentioned also mean that some previous sources of earnings no longer exist.

But my main concern about the quality of future earnings at Centrica is the nature of its existing core business.

Set for long-term decline

Its British Gas division remains central to Centrica’s business strategy. But gas usage in the UK is in long-term structural decline. Centrica’s gas supply business is a shadow of what it was even a decade ago. Even so, I expect the downward demand trend to continue relentlessly.

The company’s brands have struggled with a reputation for poor customer service (fairly, in my view), so even in a declining market, the business may lose customers to rivals.

Meanwhile, fluctuations in energy prices can make revenues and especially earnings highly volatile. That is an ongoing risk that I see as baked into Centrica’s business model.

Not the share for me

Still, that does not necessarily mean that the shares do not offer value.

As last year proved, in good times, Centrica can earn well. It is sitting on a massive cash pile.

Created with Highcharts 11.4.3Centrica Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

Over five years, the shares are up 21%. Longer term, though, they have been a disaster. The price is two-thirds below its 2013 level and the dividend has shrunk in that period.

I do not like the market trends in Centrica’s main business and the possible impact of energy price volatility on its earnings. This is one value share I will not be buying.

Should you invest £1,000 in Aj Bell right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Aj Bell made the list?

See the 6 stocks

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.

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.

More on Investing Articles

Investing Articles

4 REITs Fools own for passive income

REITs often have higher-than-average dividend yields compared to other stocks, making them a solid choice to consider for passive income…

Read more »

artificial intelligence investing algorithms
Investing Articles

Up 272% in just a year, is Palantir stock just getting started?

This writer recognises that Palantir has grown its business very well -- but does the stock price offer him an…

Read more »

Runner standing at the starting point with 2025 year for starting in new year 2025 to achieve business planing and success concept.
Investing Articles

Up 50%? The Aston Martin share price forecast is mind-blowing! 

If analysts are right, the Aston Aston Martin share price could absolutely rocket in the year ahead. Harvey Jones says…

Read more »

Investing Articles

As the S&P 500 drops, here are 2 Stocks and Shares ISA holdings I’m watching

Our writer has different views on how President Trump's tariffs might affect these two US holdings in his Stocks and…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

£10,000 invested in Tesla stock at Christmas is now worth…

Tesla stock has been one of best-performing investments of the past decade. But things haven't gone to plan for investors…

Read more »

Investing Articles

Up 279% in 5 years, could Meta stock keep soaring?

Meta stock has more than tripled in five years. This writer sees lots to like about the business but also…

Read more »

Pink 3D image of the numbers '2025' growing in size
Investing Articles

25% total return in a year? Is now the perfect time to buy BP shares?

BP shares are on the front line of today's global economic and political uncertainty but analysts think they can still…

Read more »

Affectionate Asian senior mother and daughter using smartphone together at home, smiling joyfully
Investing Articles

With Cash ISA changes coming, could now be the time to consider buying shares?

Changes to the Cash ISA could lead to greater investment in the stock market. This could be a good thing…

Read more »