The Centrica (LSE: CNA) share price is firmly in negative territory today. That’s despite the FTSE 250-listed company announcing a huge jump in profit for 2021 this morning.
Having blown cold on the stock for so long, should I regard this fall as a golden opportunity to finally climb on board?
Profits double!
On a day when most investors are hiding behind their sofas, the numbers from the British Gas owner make for pleasant reading. One, in particular, stood out for me: adjusted operating profit rocketed 112% to £948m in 2021. No wonder the Centrica share price has been motoring for the last nine months or so.
No doubt some investors have been tempted to get involved following actions taken by management to make Centrica a leaner beast after losing so many customers to rivals. Direct Energy was sold last year and the disposal of Spirit Norway has also been agreed. This has helped boost Centrica’s balance sheet. In fact, the company finished 2021 with net cash for the first time in many years (£0.7bn). That’s really made me sit up and take notice.
“Broadly positive” outlook
Of course, there’s only so much weight I should give today’s results when it comes to making an investment decision. It’s Centrica’s outlook that’s arguably far more important.
Today, the £4.5bn cap business said that it was “broadly positive” on trading in 2022. That’s not exactly bullish but it’s probably realistic considering the “wider range of outcomes” noted by the company as a result of high commodity prices. The possibility of further regulatory changes is another potential headwind.
Opportunity knocks?
Centrica shares currently trade at 11 times earnings. That’s a low valuation relative to its industry and the market as a whole. So, am I interested in buying now?
Well, there are a few things that keep me wary.
Perhaps most prominently, I need to remember that Centrica has absolutely no control over pricing. As an indication of this, the company stated that it was still too early to say what the impact of Russia’s invasion of Ukraine would be. I prefer to own stakes in companies with more say in their destiny.
Another thing worth noting is the lack of dividends. That’s hardly surprising for a turnaround stock. However, I like the idea of being compensated for my patience if/when the Centrica share price goes into reverse as it has today.
On a positive note, total free cash flow jumped 71% to £1.17bn in 2021 so perhaps holders won’t have too much longer to wait? The company did also say today that there was now a “clear path to restart paying a dividend”. Personally, I’ll wait until I see it.
My verdict
As encouraging as today’s results are, I don’t think they’re enough to radically alter my feelings about this stock. If I did have the cash to spare right now, I’d be taking full advantage of the market crash and buying shares in higher-quality companies elsewhere in the UK market.
Yes, this FTSE 250 member may have done well over the last year, but I’m under no illusion that a full recovery for the Centrica share price may be many years away, if it comes at all. As someone who is looking to compound his wealth, that doesn’t appeal.
Paul Summers 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.
