Duke Energy Corp (DUK)

[chmcnfunds]

Duke Energy Continues Its Maximization Of Shareholder´S Wealth

August 13, 2014 | About: DUK

In this article, let's take a look at North Carolina-based Duke Energy Corporation (DUK), a $50.58 billion market cap company, which provides electric and gas utility services in the southeastern U.S. and Ohio.

Catalysts

The company is a diversified energy company with a portfolio of domestic and international, natural gas and electric, regulated and unregulated businesses.

After the merger with Progress Energy, Duke becomes the largest regulated utility in the U.S. An important aspect after this deal, are the costs synergies that must be reached. Also, would it be possible for the firm to deliver the fuel and dispatch savings to customers.

The regulated distribution businesses have an important weight on total revenues, about 90% of consolidated earnings. During the past years, Duke's utilities have been able to win higher customer rates from regulators, which means higher profits. For the next three years, it is projected that almost $24 billion of capital expenditure will be designated to its regulated businesses.The remaining 10% corresponds to the commercial and international segments which are unregulated.

With respect to the management´s plans, they are looking at the divestiture of its 7.5-gigawatt Midwest commercial generation fleet portfolio. They project the final sale by the end of this year and will reduce exposure to volatile commodity prices and generate more stable earnings. Estimations based on recent transactions indicate that the transaction could reach $2.5 billion.

The international segment

The company focuses on power generation in Latin America. Brazil represents about half of total operating revenue. In this country, Duke benefits from market-based rates and annual inflation adjustments.

Other international operating revenue abroad comes from a mix of Latin American countries and a joint venture in Saudi Arabia where the company owns a 25% interest in National Methanol Company, a large producer of methanol and methyl tertiary butyl ether.

Cash dividends

Dividend-payment history affirms its commitment to maximize shareholder wealth. Recently, the company raised its quarterly dividend by $0.015 to $0.795 per quarter, or an annual rate of $3.18 per share. This is a 1.9% increase from the prior dividend of $0.78. The company has paid quarterly dividends continuously since 1926. The current dividend yield is 4.4%, which is very good to protect the purchasing power, and is above the industry average as well as S&P 500 average dividend yields.

Revenues, margins and profitability

Looking at profitability, the revenue growth of 12.6% has outpaced the industry average.The gross profit margin (34.48%) has increased from the same quarter the year before. However, the net profit margin is negative (-1.46%) which is not good for investors. Earnings per share decreased in the most recent quarter compared to the same quarter a year ago.

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Ticker
Company
ROE (%)
DUK
Duke Energy
6.45
AEP
American Electric Power Co., Inc
9.2
CNP
CenterPoint Energy, Inc.
7.18

Industry Median
7.96
The company has a current ROE of 6.45% which is lower than the one exhibited by American Electric Power Co., Inc. (AEP) and CenterPoint Energy Inc. (CNP). It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.

1407903634829.png (click link for charts/diagrams)

Relative valuation

In terms of valuation, the stock sells at a trailing P/E of 22.8x, trading at a premium compared to an average of 21.5x for the industry. To use another metric, its price-to-book ratio of 1.20x indicates a discount versus the industry average of 1.7x while the price-to-sales ratio of 2.0x is above the industry average of 1.52x. Two ratios indicate that the stock is relatively overvalued and seems to be an attractive investment relative to its peers.

As we can see in the next chart, the stock price has an interesting upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $19.659, that is a 14.5% compound annual growth rate (CAGR).

1407903596562.png

Final comment

As outlined in the article, Duke's international businesses seem to be a growth driver for the near future as well as capital expenditures and divestitures.

In this opportunity I would recommend fundamental investors stay away from the stock (or hold the stock if already bought), due to its high relative valuation. Perhaps when it comes a bit cheaper, it could be a good candidate for long-term portfolios.

Hedge fund gurus like Bill Frels (Trades, Portfolio), Ray Dalio (Trades, Portfolio), Jim Simons (Trades, Portfolio) and James Barrow (Trades, Portfolio) added this stock to their portfolios in the first quarter of 2014.

Disclosure: Omar Venerio holds no position in any stocks mentioned
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http://www.gurufocus.com/news/272752/duke-energy-continues-its-maximization-of-shareholders-wealth

DUK