Duke Energy Corp. (DUK) is an energy company operating in the US and Latin America. It operates in three segments: US Franchised Electric and Gas, Commercial Power, and International Energy. The US Franchised Electric and Gas segment provides utility services to 4 million residential and industrial customers in Ohio, Indiana, Kentucky, North Carolina, and South Carolina. The Commercial Power segment owns, operates, and manages power plants. It does wholesale marketing and procurement of power, fuel, and emissions allowances. It also retails electricity in Ohio. The International Energy segment operates and manages power generation facilities. It sells and markets electric power, natural gas, and natural gas liquids. It serves retail distributors, electric utilities, independent power producers, marketers, and industrial/commercial companies
Duke Energy has most of its business in the US, and it did experience the same unseasonably warm winter this year that other utilities did. However, DUK managed its way through without a hiccup. It earned only one penny less per share in Q1 2012 than it did in Q1 2011 on an adjusted basis. The GAAP number was off substantially due to an approximately $420 million charge related to the Edwardsport Integrated Gasification Combined Cycle project. The charges are the result of a settlement agreement concerning the project. The losses of income due to the unseasonably warm winter weather in Q1 2012 were largely offset by the implementation of new customer rates in the Carolinas and reduced operation and maintenance costs at the regulated utilities. Duke Energy International also did well.
The lower natural gas and oil prices are not likely to hurt DUK. It is largely a consumer of energy. It is more likely to benefit from the lower prices. Of course, you could argue that the worldwide economic slowdown may hit DUK's customers. However, the residential customers' use is relatively inelastic in the US. In Latin America DUK is more of a higher level supplier. Again, this segment is likely to retain its good profitability. The Commercial Power segment is the segment one would suppose would be most exposed to an economic downturn. However, even it is not likely to be as affected as it was during the unseasonably warm winter just past, and DUK survived that with little trouble. In fact, without the one time charge for the gasification project and the unseasonably warm winter, DUK would have had an exceptional Q1.
As it is, DUK has beaten EPS expectations in each of the last four quarters. The average analysts' EPS estimate for both FY2012 and FY2013 has been raised slightly. While analysts have lowered EPS estimates on many other companies, DUK's have been raised slightly. DUK pays a 4.37% dividend. It has a P/E of 20.52 and an FPE of 15.36. These latter two seem a little high. However, given the safety of DUK compared to other investments, these multiples are not unreasonable. This is especially true after you look at the two year chart of DUK.
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Even in these troubled times, DUK has not taken the recent fall that many other stocks have taken. Its 200-day SMA indicates a strong uptrend, which has already lasted since 2009. The 50-day SMA is strongly above the 200-day SMA. This is another positive signal. The price is perhaps too far above the 200-day SMA, but it is still within reasonable limits. Furthermore, the slow stochastic sub chart shows that DUK is near overbought levels. An investor could wait for it to get closer to the 200-day SMA, or the investor could just decide to average in. In either case a stock this strong with a good dividend of 4.37% is one that many investors will want to own in these troubled times.
Even if the stock price goes down temporarily, it will go back up relatively quickly. Plus, the new rate raise in the Carolinas should buffer DUK from any negative effects of a worldwide economic downturn. DUK's market cap of $30.62B should give it some added strength. The beta of 0.18 tells you that it should be able to float above the overall market if the overall market turns downward. Further, it is extremely encouraging that DUK was little effected by the overall market downturn last Fall. This helps one believe that it will weather the current economic troubles well. Averaging in is still a good idea, but the good dividend of 4.37% looks very attractive in this environment.
The recent raise in rates in the Carolinas should show up in future earnings reports as a big positive too. When there is no unseasonably warm weather in the winter to depress energy use, the new increases should raise DUK's earnings. This might well happen in Q2 2012 and beyond. According to DUK, positive factors in the Carolinas accounted for a +$0.05 per share addition to earnings. I expect to see these increases less disguised by problems for the rest of 2012. They should help DUK's stock price either rise or at the least consolidate.
DUK has recently filed for a rate hike in Ohio. It is very likely that it will be granted some if not all of its requests. The requests will increase the average monthly bill of a residential customer by 6.6% for electricity and 9% for natural gas per year. I don't see natural gas prices or coal prices going up demonstrably in the near term. Therefore, these customer cost additions should help DUK to grow and profit. These new rate hikes would go into effect in 2013.
DUK compares well to other steady climbing utilities such as Southern Company (SO) and Consolidated Edison (ED). These both have slightly lower dividends, and both are trading at slightly lower P/Es. However, DUK has the lowest FPE of the group at 15.36 versus 16.51 and 15.97 for SO and ED, respectively. One could argue it is the best buy.
Note: Some of the fundamental fiscal data above was from Yahoo Finance.
Good Luck Trading.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in DUK over the next 72 hours.
