LONDON -- A popular way to dig out reasonably priced stocks with robust growth potential is through the "Growth at a Reasonable Price", or GARP, strategy. This theory uses the price-to-earnings to growth (PEG) ratio to show how a share's price weighs up in relation to its near-term growth prospects -- a reading below one is generally considered decent value for money.
Today I am looking at Centrica (CNA -0.23%) to see how it measures up.
What are Centrica's earnings expected to do?
|
|
2013 |
2014 |
|---|---|---|
|
EPS Growth |
3.0% |
7.0% |
|
P/E Ratio |
13.1 |
12.3 |
|
PEG Ratio |
4.4 |
1.8 |
Source: Digital Look
City analysts expect Centrica to follow three successive years of earnings expansion with further growth this year and next.
However, the firm currently sports an extremely expensive PEG ratio for 2013, even though this is set to drop to more acceptable levels next year. Meanwhile, Centrica's projected price-to-earnings (P/E) ratio for 2013 and 2014 remain comfortably above the benchmark of 10. Any reading below this is considered cheap.
Does Centrica provide decent value against its rivals?
|
|
FTSE 100 |
Gas, Water, and Multi-utilities |
|---|---|---|
|
Prospective P/E Ratio |
15.3 |
18.0 |
|
Prospective PEG Ratio |
4.5 |
3.2 |
Source: Digital Look
Centrica's beats the average for Britain's 100 largest companies in terms of both PEG and P/E rating, while it also defeats its utilities counterparts when considering the P/E reading. However, Centrica's PEG rating falls does not compare favorably to its sector peers, indicating that these companies have better earnings growth potential in the near term.
Although at first glance Centrica does not emerge as an appetizing GARP investment, I believe that the company's strengthening position in domestic energy markets at home -- combined with rising upstream oil and gas activity across the globe -- should underpin growth over a longer term time horizon.
Cooking on gas
Centrica announced last month that it had "performed well" from the start of January up to mid-May, with extended bouts of cold weather pushing energy consumption higher during the period. Encouragingly the company said that its British Gas subsidiary's client base had risen by 28,000 household clients during the first four months of 2013, achieved by competitive pricing and attention to delivering first-class customer service.
The company is also making solid progress in international markets, and its Direct Energy division continues to ratchet up operations in the U.S. -- in particular, power volumes to the Business sector rose 19% from the corresponding 2012 period.
And Centrica is making a concerted push to secure lucrative upstream oil and gas assets across the globe, a strategy which is set to push volumes this year to 75 million barrels of oil equivalent per day from 67 million last year. The firm acquired a range of Canadian projects from Suncor in April, and further M&A activity in this area is expected in coming years.
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