We Have Neutral Stance on Duke Energy and Here Is Why…
On January 3, we reiterated our Neutral recommendation on Duke Energy Corporation (DUK) based on its stable electricity and gas operations which generate a relatively steady and growing earnings stream. The company holds a #3 Rank, which translates into a short-term Hold rating, and correlates with our long-term recommendation.
Why the Neutral Stance?
Based in Charlotte, North Carolina, Duke Energy is a diversified energy company with more than $100 billion in total assets. Its regulated utility operations serve approximately 7.1 million electric customers located in six states in the Southeast and Midwest. Its commercial power and international business segments own and operate diverse power generation assets in North America and Latin America, including a growing portfolio of renewable energy assets in the U.S.
Moreover, with its acquisition of Progress Energy in July 2012, Duke Energy dethroned Exelon Corporation (EXC) to become the largest U.S. utility in terms of market capitalization.
Duke Energy focuses on core utility operations to build its rate base through capital expenditure investments. Additionally, the company is proactively and effectively mitigating long-term environment-related risks through investment plans and constructive dialogue with policymakers. The company has also set up an electricity transmission joint venture with American Electric Power Co. Inc. (AEP) to develop a 240 mile, 765-kV transmission line in Indiana. The JV –– Pioneer Transmission –– is expected to become operational in 2014. The transmission line will transmit electricity from the relatively oversupplied Midwestern Independent System Operator (MISO) to PJM Interconnection (PJM).
Looking ahead, the company’s stable outlook is supported by its strong balance sheet and ongoing capital expansion projects which add visibility to the story.
On the flip side, market apprehensions remain restrained by the aftermath of Hurricane Sandy. New Jersey, where Duke Energy has about 65% of its customers, was hit hardest by Sandy. Also, following the third quarter earnings release, analysts apprehending a continuing trend of stable demand, weak prices and sluggish economic recovery remained on the sidelines. This is substantiated by the fact that over the past month, only 1 covering analyst, revised the estimate downward for fourth quarter 2012 with no corresponding positive revision. The sideways trend also continued for full-year 2012, with no changes in estimates.
Other Stocks to Consider
Utility stocks that are currently performing well include Huaneng Power International, Inc. (HNP) and Pike Electric Corporation (PIKE). Both these companies carry a #1 Rank (Strong Buy).