Duke Worth $25 Despite Low Earnings Expectations

Duke Energy (NYSE:DUK) is scheduled to report its first quarter earnings on Thursday. The company is likely to report a drop in net earnings due to an overall decline in electricity consumption during the quarter. Electricity demand from the commercial and industrial sectors did increase slightly, but not enough to offset the drop in residential consumption. However, sustained low natural gas prices could help improve margins slightly. Duke Energy provides electric and gas services in North America and Latin America and competes with other energy companies such as The Southern Company (NYSE:SO) and PPL Corporation (NYSE:PPL).

See our complete analysis for Duke Energy here

Falling Heating Degree-Days in the U.S.

Energy consumption by residential customers dropped in Q1 compared to the prior year largely due to the mild winter. This was evident by the drop in heating degree days, which are a measure of days during which energy is likely to be used for heating. Heating degree days are defined as days on which the average temperature is below 65 degrees Fahrenheit. Fewer heating degree days implies lower energy requirements, directly impacting Duke’s MWh per customer in its U.S. Franchised Electric & Gas division, which contributes nearly 84% of our price estimate for the company.

Focus on Renewable Energy

Duke Energy holds a very strong market position in the U.S. electricity landscape and has been working to diversify its energy production, particularly focusing on clean energy sources. During the first quarter, the company entered into a 50-50 ownership agreement with Sumitomo for two Kansas wind farms. We expect the push towards renewable energy will drive revenues in the long-term.

We recently revised our price estimate for Duke Energy from $21 to $25, which is nearly 16% above the current market price. The “Investments and Others” division has been removed and is now allocated equally across the remaining three divisions. The primary revisions for the International Energy division are a decline in the total customers forecast compared to bullish estimates earlier, and an increase in the forecasts for revenue per MWh to reflect present realizations. In the Commercial Energy division, we have reduced our revenue per MWh forecasts because of pricing pressure, while the total MWh produced forecasts have been raised to align with the current demand expectation for industrial energy. In the U.S. Franchised Electric & Gas division, forecasts for MWh per customer have been lowered to reflect the subdued residential energy demands.

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