Duke Energy (DUK) is a diversified energy company comprising three segments: Utilities, Infrastructure, and Renewable Energy. I am bullish on the stock. (See Analysts’ Top Stocks on TipRanks)
Pivot Towards Renewables
Duke is a premier service provider in the energy and infrastructure space. It’s planning to expand its current portfolio with an investment budget of $60-65 billion which will roll out between the years 2022-26. The firm is geared towards renewable energy endeavors with planned developments in Florida, Indiana, and Carolina.
The thought process behind the big spend is Duke’s pivot towards renewable energy. A recent report by the International Energy Association claimed that 4800 GW of renewable energy capacity will be available by 2026, which is a 60% increase from 2020.
The capital outlay will immediately start paying itself back, with projected earnings looking upwards.
It’s forecasted that the firm’s earnings per share will grow by 5.6% per year over the next three to five years, which is a 23.9% improvement on its existing five-year average of 4.5%.
Systemic Market Support
This could be the ideal time to opt for a utility stock. It seems as though the market’s looking for reasons to draw down with severe overreactions to any negative news. An excellent way to hedge against downside market volatility is to opt for utility stocks, which tend to outperform during defensive market sentiment.
Duke Energy produces approximately 90% of its revenue from its Utilities and Infrastructure segment, which also boasts a substantial market share, making it the ideal systemic-based pick right now.
Valuation
The stock’s non-GAAP P/E ratio is in line with the industry average, but the encouraging ratio to note is the PEG, which is trading at 0.6x. The PEG ratio measures the stock’s P/E growth relative to earnings growth, and anything below 1.00 is generally considered undervalued.
Furthermore, cash flows are robust; not only is the stock’s price to cash flow ratio trading at a 21.6% sector discount, but the firm’s cash from operations of $9.32 billion is about 22% higher than its five-year average, conveying an increase in intrinsic value.
I valued the stock based on an asset-based valuation technique and found that the current fair value per share is $102.19, indicating that the stock is trading below its fair value by approximately 2.3%.
Wall Street’s Take
Wall Street analysts are cautious, with the consensus rating being a Hold. Four out of the last five ratings were Holds, and only one analyst thinks DUK stock is a buy. The average Duke Energy price target on the Street is $105, implying 5.1% upside potential.
Concluding Thoughts
Duke Energy is pivoting towards renewable energy, and it’s expected that earnings could increase linearly. The stock may also benefit from a more defensive market in the near future.
Disclosure: At the time of publication, Steve Gray Booyens did not have a position in any of the securities mentioned in this article.
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