With a P/E of just 4.8, here is Centrica's share price forecast

I Centrica (LSE: CNA) share price has lost 21% in 12 months. It's up 67% over the past five years, but fundamental valuations can make it look cheap.

The price-to-earnings (P/E) ratio is probably the most widely used metric. And I'll try to get a handle on it.

Uncertainty about benefits

We need to decide whether to look at the trailing P/E. That has the advantage of being calculated from the actual profit, but it is in the past.

Forward IP/E is based on forecasts and helps guide us on where valuations are likely to go. But predictions are often wrong.

So, I'm just going to take the first half earnings per share (EPS), double it as my full year average, and see where that leads.

Compiled by Centrica's official reporting H1 EPS of 25.1p, down from 73p in 2023. But at the same time it puts its adjusted EPS at just 12.8p, down from 25.8p adjusted in 2023.

There is a big difference there between the mandate of the accounting standards and where the company thinks its fair share of income should be. And that's a warning for us to always be aware of one set of results, or a few sets in a relatively short period of time.

A tricky balance

However, using first-half adjusted EPS as a baseline, I get a full-year forward estimated P/E of 4.8.

In fact, it will come in higher than that, and the profit of the second half may decrease. Centrica said it expects “Profit will be measured in the first half of 2024“. The company also expects the balance to come in “going down in the second half“.

Forecasts put the full-year P/E at 6.5. That's still pretty low, in what looks like a terrible year. And analysts expect more bad news, with earnings falling over the next few years to raise the 2026 P/E to 9.6.

That's at today's share prices though, so where do analysts think it will go?

The target

City currently has a 168p share price estimate on Centrica, with a strong buy consensus. If that goes down, it could mean a 38% profit. And we would need a 72% increase to reach the top end of the target range, at 210p.

There's a lower end to the range too, at 130p. But even that is 6.6% ahead of the price at the time of writing.

This is all very uncertain. And the consumer price can often be nothing but hot air. But if I owned Centrica shares, I'd at least be happy that no one was calling for it to go down.

Oh, you know who thinks Centrica shares are well-priced? Centrica itself, is currently involved in a share buyback.

Time to shop?

To summarize, the forecasts alone are nowhere near enough for me to make a buying decision. And there are other valuation methods that may be more valuable than P/E right now.

So I will use these few snippets as part of my research. And I would need to dig a little deeper, and think more deeply about that income risk, before deciding whether to buy.