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Summary

  • In the last three quarters, Duke Energy has surpassed the estimates with good margins.
  • Duke Energy reported per share earnings of $1.11 surpassing the expectations of $0.98 per share earnings.
  • Duke Energy is investing for future sustainable growth and planning to invest between $16 billion and $20 billion over the next four years.

Duke Energy's (NYSE:DUK) stock has been showing a volatile trend in the last 12 cmonths. This stock has a total return of 5.39% in the last year and outperformed Southern Company's (NYSE:SO) total return of 3.40%. However, Duke Energy underperformed the S&P 500 and Exelon (NYSE:EXC) over the same period. Despite its volatility, Duke Energy is an attractive stock because of its healthy dividend yield and the company's growth prospects.

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Source: Ycharts

Duke Energy Earnings Surprise

Duke Energy ended its second quarter of 2014 with impressive results. Its quarterly earnings results were ahead of analysts' expectations and were good enough to impress investors. Duke Energy also increased its outlook on the back of a strong quarterly performance. And this means Duke Energy is expecting more growth which is a positive sign for investors. In the last three quarters, Duke Energy surpassed estimates with good margins. Before that, Duke Energy missed the estimates by 6.45% in the second quarter and 3.31% in the third quarter of 2013. However, this trend changed due to favorable industry dynamics and Duke Energy's efforts which brought the company on the growth track to surpass the expectations. In the fourth quarter of 2013, Duke Energy generated $1 in per share earnings beating the estimated per share earnings of $0.94 with a 6.38% surprise. In the latest second quarter results, the surprise was even higher when Duke Energy surpassed the per share earnings estimates of $1 by 11% when it generated $1.11 in per share earnings. Since Duke Energy is expecting to grow its revenues and earnings stream it is the most likely scenario that it will beat the estimates in the remaining two quarters of 2014.

Another Strong Quarter

Duke Energy's financial results show a mixed trend in each quarter. In the latest second quarter, Duke Energy missed the revenues expectations but topped the earnings estimates. Duke Energy's stock closed a little more than 1% when the company reported an 80% increase in profits. Duke Energy reported per share earnings of $1.11 surpassing the expectations of $0.98 per share earnings. This tremendous growth was primarily due to Duke Energy's regulated utility business which benefited from higher rates, warm weather that kept air conditioners on, and well-controlled operating costs.

However, Duke Energy missed revenues expectations as its $5.95 billion in revenues were lower than analysts' expectations of $6.12 billion. The revenues benefited from newly-signed contracts, contracted wholesale customers and some income tax efficiencies in the current year. The regulated utilities contributed mostly toward the earnings growth and its adjusted income of $689 million was up around 17% from $590 million in the second quarter of 2013. This increase was a result of higher pricing, favorable weather, lower operating and maintenance costs and increased wholesale net margins.

The international energy business delivered impressive growth and income from this business boosted $146 million from $87 million in the second quarter of 2013. The currency headwind remained a challenge for Duke Energy but despite the tremendous growth of this segment was driven by good numbers from Latin America, in particular higher volumes and pricing in Brazil and positive results at the National Methanol Company. The commercial power segment recorded an operating income of $16.0 million in the quarter compared to a $3.0 million loss last year. The improved results reflected higher earnings from the renewable business and from the Midwest coal and gas generation fleets.

Future Prospects

Around 80% of the earnings growth is impossible to be achieved in every quarter but Duke has a plan to maintain decent earnings growth in the long-term. Duke Energy is investing in future sustainable growth and planning to invest between $16 billion and $20 billion over the next four years. These funds will be utilized in new power generation projects, regulatory compliance and new infrastructure. Duke Energy also is on target to selling its Midwest power generation assets this year which could bring as much as $2 billion in cash and will be used for the future projects.

Duke Energy has also increased the estimates and now expects full year 2014 adjusted per share earnings between $4.50 and $4.65, up from previous estimates of $4.45 - $4.60. It had earlier pegged its long-term average annual growth at 4% to 6% up until 2016. Duke Energy should continue to post stable growth in the long-term and its 4.37% dividend yield makes it an attractive stock.

Conclusion

Duke Energy is largest power provider in the U.S. with a strong customer base and broad power portfolio. Duke Energy's regulated electricity and gas operations will enable the company to deliver steady and consistently growing revenues and a positive earnings stream. Duke also is trying to get rid of its wholesale power-generation business in the Midwest by selling its Midwest commercial generation business. This elimination will reduce the volatility of financial results and will also impact the stock price volatility. The lesser stock price volatility will set a consistent upward price movement and this will increase investors' returns.

Duke Energy's bright spots include its strong balance sheet to invest in more projects like wind power projects, ongoing capital expansion projects and the industry average dividend yield. However, strong competition, unfavorable industry dynamics, tepid demand for electricity and predominantly fossil-fuel based generation assets may remain a challenge for the company's growth.

Source: Duke Energy For Dividend Seekers