eyeQ: Centrica is unpopular with consumers but is it attractive to investors?

"Our signals are crafted through macro-valuation, trend analysis, and meticulous back-testing. This combination ensures a comprehensive evaluation of an asset's value, market conditions, and historical performance." eyeQ

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Centrica

Trading signal: long-term strategic

Model value: 153.42p

Fair Value Gap (premium/discount to Model Value): -14.71%

Model relevance: 60% 

Data correct as at 21 February 2024. Please click glossary for explanation of terms.

Last week Centrica (LSE:CNA) posted decent results and the shares jumped by 6% - their biggest one-day move since last July. This week those gains have completely unwound amid confusion about the firm’s stance on what it plans to do with its free cash – pay investors dividends, buy back shares, or invest in infrastructure projects.

That debate is all about company fundamentals and what management thinks is the best course of action for Centrica. And while it’s probably the critical dynamic right now, note the macro environment - the big picture stuff like economic growth, inflation, the Bank of England etc - is becoming more important for shifts in the stock price.

In mid-December our AI framework could only explain 12% of price action in Centrica. Today that number is 60%, and the big picture drivers are re-asserting themselves.

It’s also noticeable that inflation is the biggest single driver, according or model. And the relationship is positive – the pattern shows higher inflation expectations benefit the Centrica stock price. That suggests falling inflation will cheer UK consumers but not those holding Centrica stock.

There is some mitigating news, however. The stock screens as 14.7% cheap to overall macro conditions. To a fair degree, the idea that UK inflation will slow and weigh on the stock is already in the price.

Utility companies are under intense scrutiny right now. They made bumper profits during the inflation spike in 2022 and early 2023. And now, as prices come down, politicians and consumers will be watching to see if those benefits are passed on in a timely fashion.

So, there’s something of a paradox here.

What’s good for the consumer is falling inflation, lower utility bills.

What’s good for investors in utility stocks like Centrica is sticky inflation and pricing power.

Bottom line? If you fear inflation will remain stubbornly high in the UK, one way to “save” for your utility bills may be to invest in Centrica. We need two things to confirm a bullish signal - to see macro relevance exceed 65% and the model value stabilise. We will be on watch.

Useful terminology:

Model value

Where our smart machine calculates that any stock market index, singe stock or exchange-traded fund (ETF) should be priced (the fair value) given the overall macroeconomic environment.

Model (macro) relevance

How confident we are in the model value. The higher the number the better! Above 65% means the macro environment is critical, so any valuation signals carry strong weight. Below 65%, we deem that something other than macro is driving the price.

Fair Value Gap (FVG)

The difference between our model value (fair value) and where the price currently is. A positive Fair Value Gap means the security is above the model value, which we refer to as “rich”. A negative FVG means that it's cheap. The bigger the FVG, the bigger the dislocation and therefore a better entry level for trades.

Long Term model

The Long Term model looks at share prices over the last 12 months, captures the company’s relationship with growth, inflation, currency shifts, central bank policy etc and calculates our key results - model value, model relevance, Fair Value Gap.