DUK

[David Randolph]

The following analysis was written on September 18th, 2007:

DUK,if you please. No hurry,i'm in this long term.

1. Profile

Duke Energy Corporation (DUK), together with its subsidiaries, engages in the natural gas and electric businesses in the Americas. The company operates in six divisions: Franchised Electric, Natural Gas Transmission, Field Services, Duke Energy North America (DENA), International Energy, and Crescent Resources. The Franchised Electric division generates, transmits, distributes, and sells electricity in central and western North Carolina and western South Carolina. The Natural Gas Transmission division provides transportation and storage of natural gas in the eastern and southeastern United States, and in Ontario and British Columbia, Canada. This division also provides natural gas sales and distribution service to retail customers in Ontario; natural gas gathering and processing services to customers in western Canada; and other energy-related services. The Field Services division gathers, compresses, treats, processes, transports, markets, and stores natural gas; and fractionates, transports, markets, and stores natural gas liquids. The DENA division operates and manages power plants, and markets electric power and natural gas in the United States and Canada. The International Energy division operates and manages power generation facilities, and sells and markets electric power and natural gas. The Crescent Resources division develops and manages commercial, residential, and multifamily real estate projects primarily in the southeastern and southwestern United States. In addition, Duke Energy owns and operates a fiber optic communications network in the Carolinas serving wireless, local, and long distance communications companies; Internet service providers; and other businesses and organizations. The company also provides insurance and reinsurance of various business risks and losses. Duke Energy was founded 1916 and is headquartered in Charlotte, North Carolina.

2. Stock Price History



Thinking of the main movements and major events, I identify four phases for DUK:

1) The long term bull market, from 1980 (that's how far my Metastock database goes, but I think the company's debut in the market was prior to 1980) until April 2001, when the stock peaked at $47.7.

My fundamental data only goes back to 1994, but I can see justification for the bull run until 2001. Revenue in 1994 was $4.49 B and in 2001 it was $59.5 B. EPS grew a lot less than revenue, going up from $1.13 in 94 to $2.44 in 2001.

2) Then, on phase marked with a 2 on the chart above, the stock went through a bear trend, which took it down 74% to a low of $12.21 in March 2003. Revenue also fell 62% in the period to $22.5 B and EPS turned to a negative ($1.30).

3) Phase 3 is a recovery phase, with DUK climbing 182% to a December 2006 high of $34.5. EPS was $1.54 in 2004, $1.88 in 2005 and $1.57 in 06.

4) The point marked with a 4 on the chart is related to the following spin-off:

«On January 2, 2007, Duke Energy completed the spin-off of its natural gas businesses (Spectra Energy Corp. (Spectra Energy)), including its wholly-owned subsidiary Spectra Energy Capital, LLC (Spectra Energy Capital, formerly Duke Capital LLC), and Duke Energy's 50% interest in DCP Midstream, LLC (DCP Midstream, formerly Duke Energy Field Services, LLC), to shareholders.»

3. Short Term Chart



Since the spin-off the stock has been stuck in a trading range between $16.97 and $21.3.

Here are analysts' expectations for DUK:



$1.16 EPS in 2007 means the stock is trading at 16 times earnings, which is roughly in line with the general market average.

DUK is a $23.5 B market cap company, so it is already a giant ... a giant that isn't growing, at least not over the last few years. Let's check my best effort in terms of estimates in my valuation model.

4. Fundamental Analysis



As you probably already know, the yellow lines are known facts, the dark yellow lines are calculated automatically by excel and the white lines are my four working estimates. So let's see why I have the values you see in the white lines.

1) Dilution Factor

1.06 means I expect the share count to increase 6% a year, on average. That has been the average over the past 10 years.

2) Revenue CAGR

Revenue in 2006 was $15.18 B. As you can see on the table above, analysts are expecting just $12.77 B in 07 and $13.29 B in 2008. I think I'm being somewhat optimistic thinking revenues in 2009 will be about the same as they were in 2006, considering analysts projections, but let's leave it this way.

3) Net Profit Margin estimate

I think net profit margin will be basically the same it was in 2006, around 13%. This is already high for an electric utility company, so I don't expect it to expand (also because I expect revenues to be about the same as they were in 06).

4) EPS multiple estimate

Here I've used the electric utilities average P/E ratio for my estimate. 

5. Conclusion

The valuation model says that if estimates are met, DUK will rise 13.3% a year, on average,  between now and early 2010 and that's considered not attractive, since I look for at least 16% share price CAGR.

DUK is already a $23.5 B mammoth. Unless it's going to be GE, I don't see what's the point of investing in it, unless you're a mutual fund running billions of dollars looking for relative safety and plenty of liquidity. 

But this was just a brief analysis, I may have missed several important aspects of this company. Good luck soxguy

I'm still going to write about SHSN today, on visualjourney's request.

[soxguy]

To update,from $18.50 at the time of David's review,DUK hit $20 last week. I'm looking for $30 over the next 18 months. Making money at a snail's pace is still a positive in my book.

[soxguy]

DUK gaining mo as income hungry investors leave financials and enter the utility sector. On the way to $21

[David Randolph]

To update,from $18.50 at the time of David's review,DUK hit $20 last week. I'm looking for $30 over the next 18 months. Making money at a snail's pace is still a positive in my book.

To update, from $18.55 at the time of David's review, DUK closed Friday at $18.12.

Anyway, I didn't say the stock would go down, I wrote it would go up slowly. Which has been better than holding some of the stocks I recommend, so ... you did well soxguy

DUK is trading at 14.3 times 2008 EPS estimate and its projected growth rate for 2009 is 6.3%. It looks a bit expensive to me.