Is This Company Ruling Over the Electric Utility Industry?

Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The largest electric power holding company in the United States, Duke Energy (NYSE: DUK), has only risen 4.91% YTD, a far cry from the 15.34% return provided by the Dow Jones Industrial Average over the same time period. 

Duke is the largest electric power holding company in the US, serving more than 7 million customers in 6 states. Based on market capitalization, the company is valued at $47.25 billion. Currently, the company's business model appears relatively strong with a TTM profit margin of 9.63%. 

So with Duke still trading at a substantial discount from its 2006 highs, is this utility a solid investment in powering the world of tomorrow or should investors stay away from this electrifying company?


Strengths: 

  • Historic Assets Growth:Duke possesses a proven track record of consistently increasing the value of its assets, through acquisitions and growth, representing the ability of the company to expand


  • Recent Merger with Progress Energy:In January 2011, Duke agreed to acquire Progress Energy for about $13.7 billion, increasing the company’s nuclear portfolio to 9.0 GW, and adding 3.1 million customers and 23,000 MW in the Carolinas and Florida to Duke’s portfolio, giving the company greater diversification and a stronger presence in its industry 

  • Institutional Vote of Confidence:52% of shares outstanding are held by institutional investors, representing roughly $24 billion in investment, displaying the confidence some of largest investors in the world have in the company and its future 

  • Relatively Low Volatility: Currently, Duke carries a beta ratio of 0.32, representing a company which trades with significantly less volatility than the overall market 

  • Broad Customer Base & Geographical Reach:The company is the largest electric power holding company in the United States, serving more than 7 million customers in six states, and with this broad customer base and geographical reach comes a greater level of security and predictability for investors 

  • Free Cash Flow Position: In 2013, Duke is projected to generate roughly $1 billion in free cash flow, giving the company the financial strength to pay out its quarterly dividends, which yield 4.57% annually 


Weaknesses: 

  • High Valuation:Presently, the company possesses a price to earnings ratio of 20.22, a price to sales ratio of 2.41, and a price to book ratio of 1.15; all of which indicate a company trading with a high valuation relative to the company's growth prospects 

  • Net Debt:Duke’s $2.2 billion in cash and cash equivalents is outweighed by its debt load of $44 billion, resulting in a net debt of $42 billion, or $59.82 per share, a major financial weakness of the company 

  • Historic Revenue Decay:Revenue generated by the company has fallen from $22.52 billion in 2003 to $19.62 billion in 2012; a trend which is anticipated to reverse with projections placing 2015 revenue at $26.79 billion 


Opportunities: 

  • Expanding Customer Base: Since 2009, Duke has acquired 0.11 million customers, bringing their current customer base to 7.21 million, with further mild growth in this metric projected, presenting opportunity to the company to take advantage of 0.44 million new customers by 2019 


  • Dividend Growth: Since implementing their dividend program in 1926, Duke has consistently raised their dividend payouts and is widely expected to do so into the future 


  • Acquisitions:Duke has a long track record of aggressive acquisitions, especially in its international segment, and further acquisitions could drive sales and fuel growth 

  • Increasing Revenue per MWh:In 2009, the company charged $82.60 per MWh; currently, Duke charges $91.20 per MWh, and with further growth expected the company is presented incredible opportunity to generate additional revenue 


  • Expansion Project:The company is nearing the completion of a 618 MW gasified coal plant in Indiana, a 825 MW clean coal power plant and a 620 MW gas-fired combined cycle plant in the Carolinas, and also has various wind projects under construction totaling 770 MW in Kansas, Pennsylvania, and Texas, all of which should add to the company’s revenue generating power 

Threats: 

  • Tightening Environmental Regulation:Because of EPA regulations, Duke has said it is likely to retire 275 MW in the Carolinas and 860 MW in Ohio; with potential to retire an additional 1.08 GW in the Carolinas, 670 MW in Indiana, and 165 MW in Kentucky (totaling 3.05 GW); any further environmental regulation could lead to even further downsizing 

Competitors: 

Major publicly traded competitors of Duke Energy include The Southern Company(NYSE: SO), American Electric Power Company (NYSE: AEP), Exelon (NYSE: EXC), and NextEra Energy (NYSE: NEE).

Southern is valued at $38.21 billion, pays out a dividend yielding 4.62%, and carries a price to earnings ratio of 18.72The company's holdings include Alabama, Georgia, Gulf, and Mississippi Power Companies. The business model of the company is fundamentally sound, with a TTM profit margin of 12.64%.

American Electric is valued at $22.27 billion, pays out a dividend yielding 4.28%, and carries a price to earnings ratio of 18.04American Electric's reach encompasses 11 states. American Electric currently trades within $6-$7 from all time highs, and carries a TTM profit margin of 8.14%.

Exelon is valued at $26.82 billion, pays out a dividend yielding 3.96%, and carries a price to earnings ratio of 28.09Exelon possesses a presence across 47 states, with a generating capacity of 35,000 megawatts. Recently, the company slashed quarterly dividend payouts from $0.525 to $0.31. Fundamentally, the company's business model is weak with a TTM profit margin of only 3.84%.  

NextEra is valued at $32.11 billion, pays out a dividend yielding 3.49%, and carries a price earnings ratio of 20.73. NextEra's geographical reach spans across 26 states and 4 Canadian provinces, with 42,000 megawatts of generating capacity. The company's business model is strong with a TTM profit margin of 12.16%.

The Foolish Bottom Line:   

Financially, Duke is relatively solid with disregard to its massive debt load. The company possesses a historic track record of solid assets growth, a growing dividend, and a steady profit margin. The major weaknesses of the company include its historic revenue decay and massive debt load. Looking forward, the company is likely to experience mild growth stemming from market trends. All in all, Duke Energy is not a screaming buy or sell at its current levels, however is a solid addition into any portfolio focused on slow and stable growth and high yielding dividends. 

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Ryan Guenette has no position in any stocks mentioned. The Motley Fool recommends Exelon and Southern Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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