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If we look at its price-earnings (P/E) ratio of 6, Central (LSE: CNA) may look cheap. On top of that, at Centrica's current share price, the British Gas owner yields 3.1% – not a huge dividend but still decent in my opinion.
Even better, at its provisional results point, the FTSE 100 The company had a net cash reserve of £3.2bn.
So while it has a market capitalization of £6.9bn, by discounting that amount of cash, the market is basically valuing it at less than £4bn.
Could this be the type of offer I want to add to my portfolio?
Great brand, great cash generation potential
British Gas certainly has its problems.
Repeated examples of terrible customer service have damaged the company's reputation over the years. Meanwhile, the long-term gas demand outlook looks bleak. Gas use in the UK has been declining for many years and looks set to continue on that trajectory.
But while demand may be falling, it remains substantial. British Gas (along with other brands owned by Centrica) is well known even if it is not well liked. That gives Centrica pricing power.
Meanwhile, the company has an energy trading business, meaning its fortunes are not necessarily tied to current gas demand in the British Isles.
As the net cash position shows (Centrica was in debt just a few years ago), this is a company that is capable of generating considerable amounts of cash. I think that might still be the case.
It's hard to assess whether this is really a bargain.
Despite that, I have no plans to add Centrica shares to my portfolio, even if the current price may seem like a bargain.
A postponed plan to ban the sale of new gas boilers could extend the life of domestic gas use in the UK. But the long-term trend is clear: Centrica's core business could disappear over time.
I am also concerned about the risks posed by changes in energy prices, especially for the commercial division. While Centrica made an after-tax profit of £3.9bn last year, it had made a loss of £800m in the previous 12 months. That kind of earnings volatility can make me uncomfortable.
Given that kind of volatility, it's not clear to me whether the low P/E ratio represents the kind of bargain it might initially appear to be.
Why am I not investing?
Getting back to basics, I remain unconvinced of the long-term potential of Centrica's business.
It has strengths, including a customer base that is still large even though it is much smaller than it was before. But the demand outlook is bleak and, in the long term, I see real risks to Centrica's current business model.
So I have no plans to invest my money in buying Centrica stock for my portfolio.
