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Author: kelbon Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 8740  
Subject: Re: DUK Date: 9/26/2012 2:00 PM
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Recommendations: 10
As I quickly skimmed the linked SeekingAlfa article this caught my eye:

Over the last five years, the company has gradually increased its dividend amount by 16%.

I initially misread this as most people take about dividend increases on a per-year basis. This sounds good until you figure that that's a dividend increase of around 2.8% a year, which is, more or less, inline with inflation. A cost of living increase, but no more.

According to my 5-year discounted-earnings-plus-book-value model, the fair-value range for DUK is between $46 and $96 per share.

If you can't narrow down a range better than that in estimating fair value then it's a waste of time. Period. The lower end of this range pushes the stock well into over-priced territory.

The utility has a 2-star rating from Morningstar. Out of three analysts covering the company, two have a "hold" rating, and the other one indicated an "underperform" rating. This is a good reason to suppose that Wall Street holds both neutral and negative opinions on the company's future.

He's right about this. Morningstar considers the stock overvalued.

DUK's share price has been on an upward tear since the market's nadir in the spring of '09. Consequently, the stock's valuation is heady by historical standards. Value Line assigns the stock a P/E of 18, which, on the face of things, seems unsustainable for a company that is expected to grow earnings at about 4% over the next 3 to 5 years.

DUK has its share of worries. To quote Value Line:

The Crystal River 3 nuclear unit remains out of service, as it has been since September of 2009. Repair costs would probably be more than $1 billion. Whether this is covered by insurance is in dispute. A coal gasification plant that Duke is building in Indiana went over budget by nearly $1 billion, resulting in writedowns in 2011 and 2012, and the start-up date has been delayed from September until early 2013[…]

This stock's yield is about half a percentage point above the utility mean. In our view, this isn't enough to compensate investors for the uncertainties that Duke is facing. Furthermore, total return potential to 2015-2017 is unappealing.


Value LIne guestimates DUK's stock price to be between $55 and $75 for 2015--17. The lower end of this estimate is well below the current stock price. However the dividend is likely secure and the company gets a 2 for Safety (1 is highest) and an A for Financial Strength (A++ is highest).

kelbon
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