In Spite Of Rising Revenues, Natural Disasters To Hit Duke’s Bottom Line In 2018

by Trefis Team
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Duke Energy Corp. (NYSE: DUK) is slated to release its earnings for the fourth quarter of 2018 on February 14, 2019. The market expects revenues to remain flat at $5.8 billion in Q4 2018, similar to the level achieved in the corresponding quarter of the previous year. At the same time, EPS is expected to decline to $0.89 in Q4 2018, 5.3% lower compared to the year-ago period. Lower EPS is likely to be the result of high storm restoration costs related to Hurricane Michael that hit Florida in October 2018 and higher depreciation cost on the back of increased asset base and change in rates.

We have a price estimate of $88 per share for the company, broadly in line with its current market price. Our projection for Duke Energy’s key drivers that impact its price estimate are available in our interactive dashboard – Hurricane Michael Likely To Wash Out Some Of Duke’s Earnings. You can make changes to our assumptions to arrive at your own price estimate for the company. In addition, all Trefis Utilities Data is here.

Key Factors Affecting Earnings

Housing starts and construction: Rising economic growth and higher per capita income has led to a rise in housing starts in Q4 2018. After witnessing a decline in October 2018, housing starts have shown improvement over the remaining part of the quarter. Additionally, privately-owned housing completions in November were 0.4% more than in October 2018. A pick up in construction and housing starts is expected to add to Duke’s customer base in Q4.

(Source: Trading Economics – US Census Bureau)

Electric applications: Rising sales of electric vehicles is expected to contribute to Duke’s continuous growth. As more and more of the real economy becomes digitized, with retail moving online, increased use of wireless internet, higher demand for electric vehicles which in turn adds electric charging stations, would lead to steady growth in electric consumption. Additional customers would help in increasing the company’s pricing power in Q4, reflected in revenue per megawatt hour (MWh), which would, in turn, translate into higher revenue from Electric Utilities and Infrastructure.

Hurricane Michael: In October 2018, Florida was hit by the most powerful storm – Hurricane Michael – in its recorded history, which led to over a million power outages in the Carolinas and 70,000 outages in Florida. Duke Energy is expected to incur huge storm restoration costs, estimated to consist of $235 million of operation and maintenance expenses and about $185 million in capital costs. This is likely to adversely affect the company’s margin in the final quarter.

Growth in Renewable Energy: Official records show that 18% of all the electricity in the US was produced by renewable sources in 2017, up from 15% in 2016. The share of renewable energy is expected to see a further rise in 2018, with continuous decline in the cost of solar and wind energy generation, which is expected to translate into a steady growth for the renewable segment every quarter.

Full year picture

We expect revenues to increase by 4.3% for the full year 2018. This would mainly be driven by an increase in the customer base on the back of a rise in housing starts and privately-owned housing completions, healthy growth in gas utilities (primarily benefiting from grid improvement and modernization initiative), and a growing share of renewable energy in the US. Depreciation expenses increased by 15% in the first three quarters of 2018 compared to the corresponding period of 2017, driven by a higher asset base and an increase in depreciation rates associated with Duke Energy Progress and Duke Energy Carolinas North Carolina Rate case. We expect the trend to continue with the expense for the full year being higher than in 2017. Along with higher depreciation expense, additional outgo for storm restoration costs related to hurricane Michael is expected to weigh on the company’s bottom line. Net income margin is expected to drop from 13% in 2017 to 12% in 2018. Higher share count compared to the previous year would translate into a 5.3% decline in EPS to $4.14 in 2018, compared to $4.37 in 2017.

Regulation and Diversification to provide support to the stock

Duke Energy’s stock has not seen much volatility over the last one year. We believe that being a regulated entity, which provides Duke with huge pricing power, has been the biggest support to the company’s stock so far. However, as the demand for renewable energy is growing at a fast pace, with the acquisition of REC Solar and Phoenix Energy Technologies, Duke is diversifying in a big way and hedging its bets with renewable energy as the world moves towards having a cleaner environment. Going forward, this diversification is expected to add to the growth of the company as well as its stock.


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