I’ll admit, for the past few years, I’ve been a seller of Centrica (LSE: CNA). The company’s falling earnings, rising costs, lack of direction and fleeing customers are all warning signs about the organisation’s health, in my opinion.
However, recently, green shoots have started to appear. The latest trading update from the business shows that while all of the above pressures are still weighing on growth, customers are beginning to return.
Returning customers
Centrica’s total group customer account holdings increased by 214,000 in the four months to October, according to its trading update at the end of November.
Overall, total UK customer accounts increased by 136,000 in the four-month period. Growth in services and home solutions more than offset a 107,000 reduction in energy supply accounts.
On top of this increase, Centrica’s disposals are moving ahead. At the end of December, the company announced it had agreed to sell its 382 MW King’s Lynn combined cycle gas turbine power station to RWE Generation for £105m.
So the company is making progress on its key objectives. However, analysts are still expecting the group to report a 50%+ decline in earnings for 2019.
Growth returns
The company will return to growth in 2020, according to analysts. The City has pencilled in earnings growth of 36% for 2020. That puts the stock on a price-to-earnings (P/E) ratio of 9.8 for 2020.
This multiple looks attractive, but a year is a long time. Centrica needs to prove that the recovery reported towards the end of last year was not just a flash in the pan. Further positive updates would confirm the company’s recovery has taken hold.
With that being the case, Centrica’s outlook is now starting to brighten for the first time in many years. It looks as if the market believes in the turnaround as well. The stock is up nearly 50% from its September low.
Paid to wait
Only time will tell if the recovery will continue. Nevertheless, investors will be paid to wait for a comeback. The stock currently supports a dividend yield of 5.4%. The payout is covered 1.4 times by earnings based on 2019 numbers, so unless Centrica’s full-year figures are much worse than expected, this distribution looks secure.
Still, while the shares look deeply undervalued, this opportunity isn’t for the faint-hearted. Centrica’s has been struggling for the past five years and there’s no guarantee it has the right formula this time around.
However, for investors willing to take on the risk here, the reward could be substantial. Centrica’s peers are trading at a median P/E of around 16.5.
This suggests the stock could hit 165p based on current earnings projections over the next two years. Add in two years of dividends, and there’s a genuine chance the stock could produce a total return of 100% or more from current levels.
