Duke Energy: A Look at the Positives

Duke Energy (DUK) is currently trading near its 52-week low having dropped almost 20% in fiscal 2015. As the company has missed Wall Street's bottom line estimates in three of the last four quarters, this is not surprising. Moreover, the company's top and bottom line is under pressure, with the company reporting declines on both counts last quarter. However, will Duke be able to make a comeback going forward? Let's find out.

Positives to consider

Going into the remainder of 2015, Duke's performance should improve on the back of favorable cold weather conditions and a robust operational performance.

Further, the Midwest Generation business, which was traded off to Dynegy on April 2, 2015, will also benefit from an improvement in wholesale capacity prices and superior energy margins. These growth accelerators, however, will somewhat be offset due to weaker macro-economic conditions at International Energy, which is a result of the continued drought in Brazil and weaker MTBE costs at National Methanol.

Meanwhile, the commercial power business of Duke, which includes the Midwest Generation business, should perform strongly due to improved PJM capacity costs and better generation margins. All in all, the company's generation fleet should illustrate a superior business performance in the future, primarily driven by strong end market demand that will help Duke capitalize on its well-diversified portfolio of generation resources.

Further, Duke's controlled natural gas fleets have performed well of late, generating over 12 million megawatt-hours. Also, the performance of its nuclear fleet has improved significantly, acting as a key resource of base load production to its customers. The robust performance from the natural gas has supported the company's decision about offering better investor returns through accelerated stock repurchases.

The fleet recorded an impressive quarterly capacity factor of approximately 94%, followed by the Harris and Robinson plants, which delivered outstanding generation performance for the quarter. Duke's Edwardsport IGCC plant in Indiana also performed well last quarter. The plant recorded 79% gasifier accessibility, depicting its best performance in a single quarter.

Cost saving moves and a strong financial profile

In the past five years, Duke has delivered $687 million in guaranteed fuel and joint dispatch savings to Carolinas customers. The trend has continued this year as well, with Duke posting accumulated savings of approximately $490 million achieved through the first quarter of 2015. Due to its aggressive cost saving moves, Standard & Poor's Ratings Services has raised its issuer credit ratings on Duke and its subsidiaries to 'A-' from 'BBB+' with a stable outlook.

The ratings agency has also raised its senior unsecured debt and preferred stock ratings, reaffirming its short-term ratings and secured debt ratings on the company.


Hence, there are a lot of positives about Duke Energy despite a subdued financial and stock performance in recent quarters. But, most importantly, the stock looks like a value play due to an attractive valuation. Duke's trailing and forward P/E ratios stand at 17.5 and 14, respectively. This means that its earnings can be expected to grow in the future. In addition, Duke also carries an impressive dividend yield of 4.43%, which it should be able to sustain in the long run due to improving electricity demand and lower costs.

So, in my opinion, it will be a wise idea for investors to hold Duke shares for the long run and ignore the recent weakness as it can do well going forward.

Published on Sep 3, 2015
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

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