The largest electric power holding company in the United States, Duke Energy Corp (NYSE:DUK), has only risen 4.91% YTD, a far cry from the 15.34% return provided by the Dow Jones Industrial Average over the same time period.
Duke Energy Corp (NYSE:DUK) is the largest electric power holding company in the US, serving more than 7 million customers in 6 states. Based on market capitalization, the company is valued at $47.25 billion. Currently, the company’s business model appears relatively strong with a TTM profit margin of 9.63%.
So with Duke Energy Corp (NYSE:DUK) still trading at a substantial discount from its 2006 highs, is this utility a solid investment in powering the world of tomorrow or should investors stay away from this electrifying company?
Strengths:
Historic Assets Growth:
Duke possesses a proven track record of consistently increasing the value of its assets, through acquisitions and growth, representing the ability of the company to expand
In January 2011, Duke Energy Corp (NYSE:DUK) agreed to acquire Progress Energy for about $13.7 billion, increasing the company’s nuclear portfolio to 9.0 GW, and adding 3.1 million customers and 23,000 MW in the Carolinas and Florida to Duke’s portfolio, giving the company greater diversification and a stronger presence in its industry
Institutional Vote of Confidence: 52% of shares outstanding are held by institutional investors, representing roughly $24 billion in investment, displaying the confidence some of largest investors in the world have in the company and its future
Relatively Low Volatility: Currently, Duke carries a beta ratio of 0.32, representing a company which trades with significantly less volatility than the overall market
Broad Customer Base & Geographical Reach: The company is the largest electric power holding company in the United States, serving more than 7 million customers in six states, and with this broad customer base and geographical reach comes a greater level of security and predictability for investors
Free Cash Flow Position: In 2013, Duke Energy Corp (NYSE:DUK) is projected to generate roughly $1 billion in free cash flow, giving the company the financial strength to pay out its quarterly dividends, which yield 4.57% annually
Weaknesses:
High Valuation: Presently, the company possesses a price to earnings ratio of 20.22, a price to sales ratio of 2.41, and a price to book ratio of 1.15; all of which indicate a company trading with a high valuation relative to the company’s growth prospects
Net Debt: Duke’s $2.2 billion in cash and cash equivalents is outweighed by its debt load of $44 billion, resulting in a net debt of $42 billion, or $59.82 per share, a major financial weakness of the company
Historic Revenue Decay: Revenue generated by the company has fallen from $22.52 billion in 2003 to $19.62 billion in 2012; a trend which is anticipated to reverse with projections placing 2015 revenue at $26.79 billion
Opportunities:
Expanding Customer Base: Since 2009, Duke Energy Corp (NYSE:DUK) has acquired 0.11 million customers, bringing their current customer base to 7.21 million, with further mild growth in this metric projected, presenting opportunity to the company to take advantage of 0.44 million new customers by 2019
Dividend Growth: Since implementing their dividend program in 1926, Duke has consistently raised their dividend payouts and is widely expected to do so into the future
Acquisitions: Duke has a long track record of aggressive acquisitions, especially in its international segment, and further acquisitions could drive sales and fuel growth
Increasing Revenue per MWh: In 2009, the company charged $82.60 per MWh; currently, Duke Energy Corp (NYSE:DUK) charges $91.20 per MWh, and with further growth expected the company is presented incredible opportunity to generate additional revenue
Expansion Project: The company is nearing the completion of a 618 MW gasified coal plant in Indiana, a 825 MW clean coal power plant and a 620 MW gas-fired combined cycle plant in the Carolinas, and also has various wind projects under construction totaling 770 MW in Kansas, Pennsylvania, and Texas, all of which should add to the company’s revenue generating power
Threats:
Tightening Environmental Regulation: Because of EPA regulations, Duke has said it is likely to retire 275 MW in the Carolinas and 860 MW in Ohio; with potential to retire an additional 1.08 GW in the Carolinas, 670 MW in Indiana, and 165 MW in Kentucky (totaling 3.05 GW); any further environmental regulation could lead to even further downsizing
Competitors:
Major publicly traded competitors of Duke Energy include The Southern Company (NYSE:SO), American Electric Power Company Inc (NYSE:AEP), Exelon Corporation (NYSE:EXC), and NextEra Energy, Inc. (NYSE:NEE).
The Southern Company (NYSE:SO) is valued at $38.21 billion, pays out a dividend yielding 4.62%, and carries a price to earnings ratio of 18.72. The company’s holdings include Alabama, Georgia, Gulf, and Mississippi Power Companies. The business model of the company is fundamentally sound, with a TTM profit margin of 12.64%.
American Electric Power Company Inc (NYSE:AEP) is valued at $22.27 billion, pays out a dividend yielding 4.28%, and carries a price to earnings ratio of 18.04. American Electric’s reach encompasses 11 states. American Electric Power Company Inc (NYSE:AEP) currently trades within $6-$7 from all time highs, and carries a TTM profit margin of 8.14%.
Exelon Corporation (NYSE:EXC) is valued at $26.82 billion, pays out a dividend yielding 3.96%, and carries a price to earnings ratio of 28.09. Exelon Corporation (NYSE:EXC) possesses a presence across 47 states, with a generating capacity of 35,000 megawatts. Recently, the company slashed quarterly dividend payouts from $0.525 to $0.31. Fundamentally, the company’s business model is weak with a TTM profit margin of only 3.84%.
The Foolish Bottom Line:
Financially, Duke Energy Corp (NYSE:DUK) is relatively solid with disregard to its massive debt load. The company possesses a historic track record of solid assets growth, a growing dividend, and a steady profit margin. The major weaknesses of the company include its historic revenue decay and massive debt load. Looking forward, the company is likely to experience mild growth stemming from market trends. All in all, Duke Energy is not a screaming buy or sell at its current levels, however is a solid addition into any portfolio focused on slow and stable growth and high yielding dividends.
The article Is This Company Ruling Over the Electric Utility Industry? originally appeared on Fool.com and is written by Ryan Guenette.
Ryan Guenette has no position in any stocks mentioned. The Motley Fool recommends Exelon and Southern Company. Ryan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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