Should you pile into Centrica plc, down 30% over six months?
If there was an award for the most disliked company by both shareholders and investors, Centrica (LSE: CNA) would surely be in contention.
Over the past six months, shares in the utility provider have dived by around 30%, excluding dividends, as the firm's earnings outlook has deteriorated thanks to fleeing customers and the prospect of an energy price cap.
However, the best time to buy stocks is often when the rest of the market is selling. So, does this mean Centrica could be worth buying today?
What's behind the decline?
Following a shock profit warning last November, the British Gas owner failed to reassure investors about its outlook when it reported half-year results to the end of February. Earnings before interest, tax, depreciation and amortisation dropped 9% with adjusted operating cash flow slumping 23% as a result.
Perhaps more concerning is the fact that the number of customers purchasing energy and energy services from Centrica dropped 7% year-on-year, pushing total gas consumption down by 3% and energy consumption down by 8%. In other words, customers are rapidly switching off and it's not surprising. Reflecting on these numbers, CEO Iain Conn called the second-half performance "weak."
But it's not just the departure of customers that has clouded Centrica's outlook. The government's planned cap on energy bills threatens to hit profits generated by highly lucrative standard variable rate tariffs, which around 12m households in the UK are currently using.
To try and offset some of these pressures facing the business, Centrica is once again taking an axe to costs. It has increased its cost saving target to £1.25bn per annum (from the original £500m) by 2020, meaning 4,000 more jobs will go, mostly from the group's UK energy supply business.
Does this mean shareholders will receive better returns going forward? It's difficult to tell at this early stage. Being so aggressive with cost cutting could only accelerate the customer exodus, as Centrica is a customer-focused business. If the cost cutting impacts the customer experience, account losses may only accelerate leading to further pain for investors. At the same time, it's impossible to tell what impact upcoming government regulation will have on the company.
According to analysts at Investec, Centrica's earnings per share could be slashed by as much as 50% following the introduction of any limit on the amount it is allowed to charge customers. If this turns out to be an accurate forecast, the shares look expensive today.
Analysts are currently expecting earnings per share of 13p for 2019. A 50% cut to this forecast gives earnings of 6.5p for 2019. Based on this estimate, the shares are trading at a forward P/E of 22, against a sector average of 14.
The bottom line
So, even though the stock might look cheap today trading at a forward P/E of 10.4 and supporting a dividend yield of 8.1%, it's difficult to predict, with any degree of certainty, how the group's earnings will evolve over the next few years. With this being the case, I don't think it's time to pile into Centrica after recent declines.
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Rupert Hargreaves owns no share 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.