Could the Centrica share price underperform the FTSE 100 by another 70%?

In the last five years, the Centrica(LSE: CNA) share price has fallen by over 60%. Clearly, that’s a hugely disappointing performance for the company’s investors, with regulatory risks, a changing business model and poor financial performance contributing to a decline in investor sentiment.

At the same time, the FTSE 100 has gained 10%. Looking ahead, could further underperformance be on the cards for the utility company? Or, does it offer turnaround potential alongside another unpopular FTSE 100 share which released a trading statement on Wednesday?

Uncertain outlook

The company releasing an update on Wednesday was FTSE 100 retailer Sports Direct(LSE: SPD). In a brief statement, it confirmed that trading is in line with expectations. It expects to deliver a rise in underlying EBITDA (earnings before interest, tax, depreciation and amortisation) of between 5% and 15% for the current financial year, excluding the acquisition of House of Fraser. It also confirmed its plan to transform House of Fraser into the Harrods of the High Street.

With the Sports Direct share price having fallen by over 50% in the last five years, it has significantly underperformed the FTSE 100 and many of its retail peers. Political risk has been high for the company, while a weak trading environment has hurt its financial performance.

Looking ahead, the company is forecast to post a rise in earnings of 15% in the current year, followed by further growth of 10% next year. This puts it on a price-to-earnings growth (PEG) ratio of 1.6, which suggests that it could offer growth at a reasonable price. As such, and while the retail sector may continue to struggle in the short term due to weak consumer confidence, in the long run the company appears to have a sound investment outlook.

Turnaround potential

Centrica may also offer recovery potential in the long run. The recent announcement of a price cap on variable rate tariffs seemed to improve investor sentiment to some degree, since it was perhaps not as tough as many investors were anticipating. And with the company’s new strategy gradually being implemented, it has the potential to become an improved business which is more efficient than it has been in the past.

With the stock having a price-to-earnings (P/E) ratio of around 13, it seems to offer good value for money after its share price fall. It is expected to report a modest rise in earnings in each of the next two financial years, which could help to improve investor sentiment to some degree.

Clearly, the company is in a period of major change. It is investing heavily at a time when energy companies face the potential risk of nationalisation if Labour wins the next election. This could mean that investors continue to be cautious about its prospects. But if it is able to deliver on its current strategy, then a stronger and more profitable business could emerge. With a dividend yield of 8.3%, its total return potential continues to be high over the long run.

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Peter Stephens owns shares of Centrica. 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.

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