This Utility Company is Hard to Miss
Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In volatile markets, investors tend to invest in stocks that pay good dividends and have a good growth story. I being indifferent was searching for good dividend paying businesses with sound business models and a lot of stocks came up on my radar. I added another filter of market capitalization and was left with fewer options. Trying to be even more defensive with my strategy, I selected the utilities and services sector, and Duke Energy (NYSE: DUK) came up. I went in to research its business model and its competitive advantages, and was simply amused by the findings.
Duke Energy is a diversified multinational energy company, that processes and supplies energy to different parts of the world. The company has been consistently generating a steady stream of cash flows, and overtook Exelon Corporation (NYSE: EXC) as the largest utility company of the US. Here are a few reasons as to why Duke Energy could turn out to be a great investment.
Size Matters
Duke Energy recently acquired Progress Energy Inc. for $32 billion, making the joint entity the largest US utility company, expanding the operations of the company to 7.1 million customers. The company is now in a position to cope up with the high costs of upgrading the existing grids, while also adding newer grids. Also both companies operated in mutually exclusive areas, and the acquisition allows Duke to extend its reach across the nation, without any regulatory hassles.
One of the competitors of Duke Energy, Dominion Resources Inc. (NYSE: D) was also looking to acquire Progress Energy having similar expansion plans, but failed to do so. Duke Energy now has over 58,200 megawatts of electricity generating capacity compared to Exelon’s 35,000 megawatts capacity. Dominion has the capacity to produce 27,000 megawatts and another competitor being Southern Company (NYSE: SO), which has only 3 plants operational and is too small in size to be compared to Duke Energy.
Need for Power
As the Euro problem gets sorted out, the world will get back to normal, and the demand for electricity will kick up. By 2035, it is expected that the demand of electricity will increase by 22%, and companies like Duke will benefit from it. It’s also clear that Duke’s peers are way behind in their electricity generation capacity, and with Duke penetrating deeper in the world, it looks like the company is gearing up to grab a long term foothold in the utilities market.
Upside in Profit Margins
Since both the companies are now functioning as one, the resulting company needs lesser employees. Duke Energy is now laying off more than 1800 employees, which will save on costs and add to its profit margin. The energy company is also looking towards saving costs in three of its primary operations which are, fuel, joint dispatch of assets and optimization and management solutions in both fuel and non fuel operations. This way we’re looking at savings up to 8-11%, which at the end of the day, would reflect in the form of added net profit margin. If these saving estimates hold ground, the net profit margin is expected to double, and a significant move up in the stock price should be expected.
Fundamentals
|
Company |
Market Cap |
Dividend Yield |
Net Profit Margin |
EPS this year |
|
Duke Energy |
$45.77 billion |
4.71% |
10.35% |
28.1% |
|
Excelon |
$30.9 billion |
5.8% |
8.52% |
-2.95% |
|
Dominion |
$30.73 billion |
3.92% |
10.27% |
-51.2% |
|
Southern Co. |
$40.02 billion |
4.25% |
13.21% |
8.06% |
From the comparison table above, we can see that Duke Energy has given the best EPS this year, coupled with the second best dividend yield amongst its peers. The company also has the second best profit margin, and these metrics make it easy for us to spot Duke as the clear fundamental pick amongst its peers.
To Conclude
The company is now the largest utilities provider in the US, and is not supply limited compared to its peers. With profit margins like that, the stocks can surely give a stellar performance over the coming quarters. Even after reaching at the top, the company is looking towards adding a number of grids, and upgrading the existing grids, which highlight the vision of the company. Also the acquisition allows Duke Energy to take advantage of the existing licenses of Progress Energy and to venture in new areas. The dividend yield also looks attractive to lure investors, and all these reasons altogether make Duke Energy a compelling buy.
PiyushArora has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Dominion Resources, 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.If you have questions about this post or the Fool’s blog network, click here for information.
