Earnings: time to buy Centrica shares after bumper profits?

Having trouble with soaring energy costs? Many of us may be suffering, but things are getting better Centrist (LSE: CNA). The owner of British Gas just posted soaring profits for 2022. Centrica shares rose only 5% in morning trading in response.

The price has gained 33% over the past 12 months, mind you, climbing since November as the energy cost crisis began to bite.

I note that the company opened its results statement telling how it helped its customers, and paid around £1bn in tax on its profits. If I were the cynical type, I might suspect that there was an attempt to mitigate any possible criticism.

Result

But shareholders usually want to know about profits, and they don’t disappoint. Total adjusted EBITDA came in at £4bn. The company posted just £1.9bn for the previous year.

Adjusted basic earnings per share rose from 4.1p in 2021 to 34.9p. And, erm, the company’s adjusted effective tax rate is lower than it was in 2021. The group ended the year with adjusted net cash of £1.2bn on the balance sheet, up from £680m.

Despite the big EPS figure, Centrica has to pay a full year’s dividend of just 3p per share. At the current share price, that’s a 2.9% yield. However, it is covered by very strong earnings. And it is unwise to set long-term expectations based on one exceptional year.

take profit?

Why has the stock price reaction been rather muted? I would not be surprised if investors who bought last year have taken some profits, helping to hold back a bit. “Buy on rumors, sell on news“, goes the old investment adage. And I doubt many will expect this level of profit to be repeated next year.

What does it all mean for investors today? For me, it’s all about two things. The first is valuation. At the latest share price, EPS of 34.9p per share represents a price-to-earnings (P/E) ratio of just three.

This is a one-off 2022 income, though. And we really can’t take it to indicate reliable long-term value. In 2021 adjusted EPS, for example, the same share price will put P / E at 25. And it is not obviously cheap at all. But then, that after a few years of falling profits, and also can not be considered to say anything about the future.

Outlook

This latest results update contains a lot of words about Centrica’s prospects for 2023. But no overall numbers. All I can hope for is that it won’t be profitable next year.

Estimates create a P/E of around eight in two years, with a dividend yield of 4%. It’s a bit risky to look that far ahead, but it makes Centrica shares look cheap.

Another factor for me is that I only invest for the long term. And signs show gas may not have a long-term future. Therefore, I will not buy it. But I wouldn’t be surprised to see Centrica investors making a profit a few years earlier.