Duke Energy: Is Clean Coal a New Lease On Life?

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

If you ever wondered whether clean coal really is possible, the answer is yes, thanks to technological advancements. Coal is one of the major sources of energy across the world, and certainly cheaper than many alternatives. Companies involved in producing energy from coal have rallied in the past couple of years as natural gas prices continued to decline. 

Duke Energy (NYSE: DUK) is one of the companies that have capitalized on the misfortunes of natural gas companies, and now looks set to take a step further with clean coal. The company announced last week that it brought a 618-megawatt coal gasification plant in Indiana on line, which replaces the traditional coal plant. The facility will emit 70% less EPA-regulated pollutants and 50% less carbon dioxide per megawatt produced. 

Clean energy is indeed the future; as many organizations continue to advocate against environmental pollution due to gaseous emissions, and governments regulate reduced emissions standards. Therefore, Duke Energy appears to be on the right footing as far as the future is concerned.

Duke Energy is not the only company exploring the potential for clean coal. Close rival American Electric Power (NYSE: AEP) is also in the process of pursuing this new lease on life in the coal business. Last year, the company completed the first "advanced ultra-supercritical steam cycle" coal-fired power plant. The $1.7 billion, 600 MW plant now serves as a principal source of base load energy for Louisiana, Arkansas, and Texas.

Meanwhile, CenterPoint Energy (NYSE: CNP) continues to expand its natural gas business. The company recently announced that it would add 35 natural gas vehicles to its fleet across Arkansas, Louisiana, Minnesota, Mississippi, Oklahoma and Texas. Furthermore, CenterPoint Energy expects to provide natural gas services to at least 17 new compressed natural gas filling stations built in its service territory.

What’s the future of clean coal?

Environmental activists and governments advocate for clean energy as the fight against global warming continues. Companies whose business does not support this goal are bound to suffer going forward. Eventually, clean energy from sources such as natural gas, wind and solar may edge them out of business.

However, technology seems to be changing that. Based on recent developments as noted above, pollutant sources such as coal could have suffered tremendously due to the push for clean energy. However, companies engaged in coal energy business can now breathe a sigh of relief as they find a way in, to compete in the clean energy business.

Is clean coal sustainable? and if it is, can it compete on equal footing with solar or natural gas in terms of “cleanliness?” In my opinion, this is highly unlikely. However, the clean coal business could keep Duke Energy in the limelight for the next few years. This presents a potential upside for the company as it explores other avenues for the long-term, such as natural gas.

Performance: Duke Energy trumps competitors

Duke Energy revenues grew by 61.8% for the most recent quarter, as compared to AEP’s 5.50% growth year-over-year. On the other hand, CenterPoint’s revenues grew by 14.60%. Duke Energy also reported a massive growth in earnings, increasing by 114.9%, as compared to AEP’s decline of 6.7%.

Duke Energy’s margins are still the most impressive among the trio. The company boasts an operating margin of 22.31% as compared to 19.95% for AEP, and 16.56% for CenterPoint. Duke Energy’s profit margin for the trailing 12-months stands at 9.87% as compared to AEP’s 8.14% and CenterPoint’s 5.38%. The Charlotte, NC-based electric utilities company is equally impressive when it comes to gross margins, with 40%, while AEP and CenterPoint have 37% and 35% respectively.

Valuation

Duke Energy has EPS of $3.29, which is more than double the industry average of $1.26. It also trumps AEP’s earnings of $2.54 per share significantly, and sweeps out CenterPoint’s $0.97.

However, the company appears a little bit more expensive than AEP, in terms of Price-to-Earnings (P/E) ratio. Its P/E of 20.76 times is higher than AEP’s 18.06. Duke Energy’s P/E ratio is also above the industry average of 19.86, but is below CenterPoint’s 24.4.

Nonetheless, when we factor in estimated earnings growth rate for the next five years, Duke Energy appears the cheapest with a PEG ratio of 3.87 times, as compared to AEP’s 3.96, and CenterPoint’s 4.0. However, this is well above the industry average of 0.77 times.

The bottom line

Duke Energy looks outstanding, fundamentally among its competitors. However, the uncertain future of how the market could react to clean coal in the long-term poses a business risk. Nonetheless, the company’s immediate outlook, at least for the next two years is promising, as clean coal business presents a potential upside before the clean energy campaign finally raises the bar. 

More from the Motley Fool

If you're on the lookout for some currently intriguing energy plays, check out The Motley Fool's "3 Stocks for $100 Oil." For FREE access to this special report, simply click here now.


Nicholas Kitonyi has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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!

blog comments powered by Disqus