Why NextEra’s 5x Price Rise Versus Duke Energy Is Not Justified

The stock price for NextEra Energy (NYSE: NEE), the largest electric utility holding company in terms of market cap, is up by over 100% since the beginning of 2017, driven by the company’s fast-growing renewable energy business.  In comparison, Duke Energy (NYSE:DUK), one of the largest U.S. utilities in terms of customer base, has seen its stock grow by less than 20% during the same period. In other words, NextEra stock grew at 5x the rate of Duke’s. This comes despite the fact that NextEra’s revenue growth was just about 1.7x faster (19% vs. 11%) with its margins also only slightly ahead (19.6% vs 14.8%). Does that make sense? We don’t think it does, and believe Duke is likely a good investment at the moment compared to NextEra, as investors seek the stability and dividends of utility stocks during increasingly uncertain times. Our dashboard Is NextEra Energy’s 5x Stock Price Growth Vs. Duke Energy Justified? has the underlying numbers.

NextEra’s Fundamentals Are Stronger, But Duke’s Valuation And Outlook Is Attractive

Let’s look at the core business prospects of both companies a little more closely. NextEra operates the largest electric utility in the state of Florida and also has a non-regulated arm called NextEra Energy Resources (NEER) which is one of the world’s largest producers of wind and solar energy. The company’s valuation has soared over the last few years, as investors sought the strong growth in its renewables business and its exposure to the Florida electric utility market, which provides a favorable regulatory environment along with higher population growth and population density.

Duke Energy is one of the largest regulated utilities in the United States, serving over 7.7 million customers in the Midwest, Florida, and the Carolinas. The company provides natural gas via its Piedmont Natural Gas and Duke Ohio operations. There could be a couple of factors impacting Duke’s valuation, versus NextEra and other utilities. We estimate that the company’s Carolinas operations account for over two-thirds of total revenues and the regulatory environment here is generally viewed as less favorable compared to Florida, due to higher regulatory lag and lower allowed return on equity. Duke’s renewable segment is also very small, accounting for about 2% of total revenues, compared to NextEra’s fast-growing renewable operations that account for almost 30% of revenues.

That said, we still believe Duke’s business looks quite attractive compared to NextEra at current prices. Duke trades at just 16.5x 2019 earnings, compared to 30x for NextEra. Moreover, Duke’s growth outlook could also improve. The company plans to invest roughly $56 billion between 2020 and 2024, with spending likely to be targeted at regions with expanding populations. Given the low-interest-rate environment, this could help the company’s overall earnings and dividend growth.

Are Dominion and Southern better utility picks compared to Duke Energy? Find out in our dashboard analysis Trefis Utilities Theme: NextEra, Duke, Dominion & Southern which has more details on the fundamental and stock price performance of key U.S. listed utilities.

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