Why Duke Is Worth $77 Per Share

Jul.19.12 | About: Duke Energy (DUK)

Duke Energy (DUK) is a US listed utility company that owns, operates and manages power plants and power generation facilities and sells natural gas and liquids. The company has a market cap of $87 billion and is a S&P 500 company. Competitors in the electric utility field include American Electric Power (AEP), Consolidated Edison (ED), Southern Company (SO) and Exelon (EXC).

Why I like Duke

Duke Energy is a electric utility company, whose business model is defensive by nature. Defensive businesses in the power generation industry, being less cyclical, exhibit two distinct advantages for investors:

  • They are highly profitable on a marginal basis: Once capex is funded the marginal cost per unit decreases as sales increase adding to the company's profitability
  • Demand is usually pretty stable which translates into a comparatively stable cash flow stream

Risk-conscious investors, who feel uncertain about the future economic development and fear disruptions from the financial sector or Europe should consider a Duke Energy investment for the following reasons:

1. Stable cash flow streams can efficiently mitigate equity market uncertainty. High cash flows translate further into high dividends, that are relatively secure as demand for utility is inelastic. This is a very favorable business driver. Investors profit with a superior 4.63% dividend yield accordingly.

2. EPS growth this year stood at 28% which is way above average. Annual EPS growth in the past 5 years stood at over 7% indicating a solid underlying growth trend. In addition, in the last 4 quarters, Duke has consistently announced higher EPS beating consensus estimates.

3. The company is cheap: Given the low business risk, stable cash flow stream, good profitability with a net profit margin of 10.3% and high dividend, an earnings multiple of 12.8 is very low.

4. The stock price correction over a possible CEO change should be seen as contrarian investment opportunity to pick up Duke on the cheap.

5. The high estimate of 2013 EPS stands at $4.82 which is consistent with my own estimate based on historical growth rates. Applying a multiple of 16 yields an intrinsic value estimate of $77.12 representing about 17% upside potential.

5. Technically, Duke just sits on top of its lower bound trend canal. Chartists may find this an interesting Buy opportunity as well: Can Duke hold its level around $66, the company has immediate upside potential to its upper bound trend canal of $70.50.


Investors, who desire a relatively stable income stream might consider the utility stock of Duke an interesting addition to a bond-dominated portfolio. Given the low valuation as well as low risk, dividend chasing investors find a well-prized bargain opportunity. As always, investors eager to limit downside exposure, should only enter into a Duke investment with a stop loss limit.

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