Duke Energy: Wait For The Price To Fall Some More

| About: Duke Energy (DUK)
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The Duke Energy Corporation (NYSE:DUK) and Duke Energy Corporation (PGN) merger did complete the Monday of the previous week, making the new utility the largest in the nation with 7.1 million customers in six states. Shortly after the merger there was a shock wave - William Johnson, the head of Progress Energy and the planned head of the new merged company resigned by "mutual agreement" and Duke's newly formed board put Duke's chief executive James Rogers at the helm. With the move, Standard & Poor's cut the credit rating of Duke Energy based on the surprise switch and North Carolina stated that it might not have approved the deal if its customers were misled in this deal.

Don't feel bad about Mr. Johnson's release though, as he will receive around $44 million for his exit from the company. However, if you are, or know a shareholder of Duke Energy, you may want to feel bad for it. Duke Energy has dropped from $70 a share after the 3 for 1 reverse split last Tuesday to below $65 a share Monday morning of this week, with the appearance that the stock may lose more steam, especially compared to its peers, which have held pretty flat in early trading.

I believe that Duke Energy could be a nice short play for a bit more of a fall until it holds steady and maybe comes back to an increase. With one of my stock picks, Exelon Corporation (NYSE:EXC) the share price dropped off after its merger with Constellation, and continues to hang low based on lower projected earnings due to depressed generation prices.

In a previous article of mine, I was very bullish on Exelon's future, when the stock was at a 52-week low in February at $38 a share, and it has held at the $37-$38 range since. I believe they have really estimated Exelon's earnings a bit too low, now projected for $2.78 for 2012 and $2.82 for 2013. I think the company can easily beat those low-end projections, especially with the earnings surprise that we saw for the first quarter of 2012, when there was low generation demand due to the warmest winter on record.

I also wrote an article earlier this year about Dominion Resources (NYSE:D). I believed that it outperformed the other utilities and it was ready for a bit of a pullback. I can admit when I'm wrong, and I was, as it outperformed the other utilities I recommended, except for First Energy (NYSE:FE), which has taken off from around $42 a share in February to $49 today. Sadly for me, I purchased/added to my portfolio the other two picks from this article, PPL Corporation (NYSE:PPL) and as mentioned earlier, Exelon Corp .

The one article I will take credit for is on Sempra Energy (NYSE:SRE). It has gained over 20% since I published a bullish article on it. Its exposure to natural gas storage, like Dominion, I believe has helped it.

So why did I mention all of these "fluff" to start my article? Well for one, I'm not perfect on my picks (though I haven't lost my shirt on PPL Corporation or EXC), and two, sometimes looking at the simple figures doesn't do it all. For example, lets review the PE ratio. Duke Energy is not included because it has skewed the graph because it has not factored in the reverse split; but, its P/E is around 19.

PE Ratio of selected Utilities

Click to enlargePPL PE Ratio Chart

PPL PE Ratio data by YCharts

So what is there to learn from this chart? Besides SRE, the other low PE utilities (PPL Corporation and Exelon Corporation) have performed poorly, while the higher PE utilities have performed better. Some of it may be due to being unregulated/regulated utilities, or the fact that some have more exposure to natural gas, whether it is pipelines, natural gas generation units, natural gas storage, or possible LNG export facilities down the road.

Below is another chart of return on equity. Once again, PPL Corporation and Exelon Corporation are tops in these categories, with Dominion Resources and FE at the bottom.

Click to enlarge)PPL Return on Equity Chart

PPL Return on Equity data by YCharts

As stated in previous articles of mine, PPL Corporation and Exelon Corporation also lead the charge in dividend payouts, with yields well over 5%.


I would stay out of Duke Energy until it cleans up the mess it has made for itself with the CEO swap, and a possible share price between $58-$62 a share. I felt it was a bit overpriced when it was sitting at a 52-week high at the time of the merger. I still believe that PPL Corporation and Exelon Corporation are the best long-term options based on P/E ratio, return on equity, and dividend yield. If you want exposure in the natural gas market, Sempra Energy and Dominion Resources are good options, and I would definitely pick Sempra Energy over Dominion Resources.

Disclosure: I am long EXC, PPL.