Duke Energy Investors Remain Energized

Mar. 6.14 | About: Duke Energy (DUK)

Summary

Are legal and public relation concerns impacting Duke Energy's long-term outlook?

Can new projects within the space of renewable energy fuel future growth?

The costs incurred due to the cleanup effort have not been detailed by the company. Will there be future impairment costs?

Duke Energy (NYSE:DUK) continues to face major legal problems. This is in light of an unfortunate spill that (allegedly) contaminated groundwater in North Carolina. However, shareholders are taking these developments in stride. The stock has remained surprisingly resilient. Can it continue?

In fact, the stock still remains within a few dollars of its 52-week high of $75.46. This positive trading continued as news circulated that the U.S. Attorneys' Office ordered the company to turn over all relevant emails, memos, and reports from 2010 through Feb. 2, which was the date of the spill.

Specifically, the U.S. Attorney's Office in Raleigh issued subpoenas to Duke and the North Carolina Department of Environment and Natural Resources. The Associated Press reported an "official criminal investigation of a suspected felony is being conducted by an agency of the United States and a federal grand jury." Again, as damning as the launch of a criminal investigation sounds, shareholders are shrugging off this news. Shareholders seem to care more about Duke's recent earnings than any outcome from the spill -- with good reason.

Earnings

When the company reported its fourth-quarter and year-end earnings several weeks ago, analysts had expected 95 cents in earnings per share. That would have exceeded the 2012 fourth-quarter EPS of 70 cents. Earnings arrived at $1 per share, surging 43% year over year.

According to management:

For the quarter, the company achieved lower costs through synergies realized from the 2012 merger with Progress Energy (OTC:PRQNF); recovered infrastructure modernization costs through revised customer rates; and benefited from the adoption of nuclear outage cost leveling in the Carolinas, which will lessen quarterly earnings volatility caused by the variable timing of nuclear refueling outages.

Clearly, things have begun to improve, and much sooner than anyone expected. When the company reported its third-quarter earnings in November, it was noted that earnings were expected to grow (only) between 4% and 6% annually at least through 2015. Not to mention that Duke missed estimates in each of the first three quarters of 2013. The main culprit cited at the time was the warm weather.

But that never stopped investors from believing. Despite these headwinds, Duke's total returns are up 8.55% over last year. That's significantly better than Southern (NYSE:SO), which was up 0.22%, but significantly lower than Dominion Resources (NYSE:D), which was up 34.54%.

Meaningful Projects

Duke's financial strengths should continue in the near term. This is considering that Duke is the largest electric power holding utility in the country. The company boasts more than $110 billion in assets. In a messy merger with Progress Energy in 2012, Duke further solidified itself as the leader in the industry. We say "messy" because of the less-than-stellar way the company went about installing its new chief executive officer.

In the end, however, the matter was settled, paving the way for the company to focus on investing in several key areas. This includes renewable energy. Recognizing that generating electricity from renewable resources will play an increasingly important role in the transition to cleaner energy, Duke is in the midst of developing renewable power projects.

CEO Lynn Good has said the company's focus will continue to be delivering on the promises made after the merger with Progress Energy. Duke wants to leverage its scale "in order to maximize the efficiency of our operational and financial performance." Also, Duke recently announced that it would be exiting its Midwest commercial generation business as a part of its effort to revamp its power plant portfolio.

Time Will Tell

While Duke is taking steps to try and improve its earnings, the effect of the spill on the company's financials cannot be taken for granted. Company officials have acknowledged that the spill affected water quality, but that it is taking steps to clean it up. Another concern is that the costs incurred from the cleanup have not been detailed by the company. Furthermore, any litigation resulting from the spill may adversely impact the company's earnings moving forward.

So far there are three strong buy recommendations for the stock, compared to 10 holds. Until some of these issues are resolved, we're advising investors to stay away from the stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: Business relationship disclosure: The article has been written by Wall Street Playbook's energy sector analyst. Wall Street Playbook is not receiving compensation for it (other than from Seeking Alpha). Wall Street Playbook has no business relationship with any company whose stock is mentioned in this article.