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He Central (LSE: CNA) share price has lost 21% in 12 months. It's still up 67% over the past five years, but basic valuation measures could make it look cheap.
The price-to-earnings (P/E) ratio is probably the most widely used metric. And I will try to control it.
Earnings uncertainty
We need to decide if we are going to look at the final P/E. This has the advantage that it is calculated from actual income, but that is a thing of the past.
The forward P/E is based on forecasts and helps us guide where the valuation could be headed. But forecasts are often wrong.
So, I'll simply take the first-half earnings per share (EPS), double it from my full-year estimate, and see where that takes us.
This is compounded by the fact that Centrica reported H1 regulatory EPS of 25.1p, down from 73p in 2023. But at the same time, it put its adjusted EPS at just 12.8p, from a 25.8p adjustment in 2023.
There is a wide discrepancy between what accounting standards require and where the company believes its fair measure of profits should be. And that's a warning to always be careful with a single set of results, or even multiple sets in a relatively short time.
Complicated valuation
Anyway, using H1 Adjusted EPS as a basis, I get an estimated full-year Forward P/E of 4.8.
In reality, it will probably be higher than that, and second-half earnings are likely to fall. Centrica said it hopes “profitability will be heavily weighted until the first half of 2024“. The company also expects net cash “fall in the second half“.
Forecasts place the P/E for the full year at 6.5. This figure is still very low, in what seems like a terrible year. And analysts expect more bad news, with falling earnings over the next few years pushing the 2026 P/E to 9.6.
That's reflected in the current share price, so where do analysts think it will go?
Aim
City currently has an average price target of 168p on Centrica shares, with a fairly strong Buy consensus. If that comes to fruition, it could mean a 38% gain. And we would need a 72% increase to reach the upper end of the target range, at 210p.
There's also a lower end of the range, at 130p. But even that is 6.6% ahead of the price at the time of writing.
All this is very uncertain. And brokers' price targets can often be nothing more than hot air. But if I owned Centrica stock, I'd at least be glad that no one was calling for it to fall.
Oh, you know who thinks Centrica stock is a good value? Centrica itself, currently immersed in a share buyback.
Is it time to buy?
In short, forecasts alone are not enough to make a purchasing decision. And there are other valuation measures that could be much more important than the P/E right now.
So I would use these few snippets only as part of my research. And you would need to dig a lot deeper and think seriously about the risk of downside earnings before deciding whether to buy.
