The last six months have been terrific for the Centrica (LSE:CNA) share price with the group’s market-cap climbing by almost 30%. That might sound a bit odd given the group’s latest results showed operating profits collapsing from £2,752m to £1,552m. Even more so, considering the analyst consensus surrounding this business is actually pretty positive despite earnings seemingly imploding.
So what’s going on? And where could the Centrica share price be 12 months from now?
Earnings are normalising
Typically, when profits collapse by over 40%, investors tend to jump ship since it’s a sign of serious trouble. However, in this case, it’s a perfect demonstration of Centrica’s sensitivity to commodities like oil & gas.
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In 2023, surging energy prices helped propel profits to record levels. But it was clear this cyclical boost was only going to be temporary. And now that energy prices have started normalising again, Centrica was up against a tough comparison period.
Therefore, despite the drop, profits for 2024 actually landed within analyst expectations. And even with capital expenditures increasing from £415m to £564m, free cash flow generation still landed near the £1bn mark. As a result, management’s net cash war chest increased from £2.7bn to £2.9bn. When paired with higher interest rates, the group’s net interest income jumped from an outflow of £19m to an inflow of £34m.
In other words, the health of Centrica’s balance sheet improved. With that in mind, it’s not so surprising to see that 13 of the 16 analysts tracking this enterprise currently have the stock at a Buy or Outperform recommendation. And overall, the average 12-month share price forecast for Centrica is 175p. Compared to the current share price, that suggests the stock could deliver returns of up to 16% by this time next year – roughly double the FTSE 100’s long-term annual average.
Nothing’s guaranteed
A 16% potential gain from a mature industry titan that’s hiking dividends is certainly nothing to scoff at. However, as promising as this might be for some investors, there are always risks to consider moving forward.
The latest forecasts anticipate energy prices to continue falling in the coming years. And consequently, Centrica’s revenue is likely going to take a hit. Analyst projections expect this impact to be offset through margin expansion. However, there’s no guarantee that management will deliver on these expectations.
In the meantime, the company has to fend off fierce competition. And since the Electricity Market Reform in 2013, that’s proven to be quite a challenge. In fact, even after its recent rally, the Centrica share price is still over 60% lower than its 2013 peak.
Time to buy?
From a valuation perspective, Centrica shares are currently quite cheap. Looking at the price-to-earnings ratio, the stock’s trading at a 5.9 earnings multiple, far below the European industry average of 14. And given that the group’s debt burden has steadily been shrinking since 2020 while free cash flow has been improving, it makes me cautiously optimistic for what the future holds for this enterprise despite the risks it continues to face.
My portfolio already has sufficient exposure to the energy sector, but for investors seeking to diversify, Centrica may be worth a closer look.
