Duke Energy Could Have 20% Upside. What Are The Catalysts?

Despite a 30% rise since the March 23 lows of this year, at the current price of around $83 per share, we believe that Duke Energy (NYSE:DUK) stock has more upside potential. The stock has risen from $64 to $83 off the recent bottom, underperforming the S&P which moved over 45% over the same period, as weaker commercial and industrial demand for electricity caused by the Covid-19 related lockdowns are hurting the company’s Revenues. Duke stock has been underperforming over the last two years as well, rising just about 11% from levels seen in early 2018, compared to the S&P which has gained over 20%. Below, we break down the key drivers of Duke’s stock price change over the last few years and take a look at potential catalysts that could see the stock rebound to its pre-Covid peak of over $100 per share. 

Putting Duke Stock’s Underperformance Into Perspective

Some of the increase in Duke’s stock price over the last 2 years is justified by the roughly 6.4% growth seen in Duke’s Revenues from 2017 to 2019. Duke’s Net Income grew at a slightly quicker pace, as Net Income Margins rose from 13% in 2017 to about 14.2% in 2019. EPS grew from $4.36 in 2017 to about $5.06 in 2019. However, the markets have assigned a lower value to Duke’s earnings, and its trailing P/E multiple has fallen from around 17.1x in 2017 to 16.3x presently. Our dashboard What Factors Drove 10.7% Change In Duke Energy Stock Between 2017 And Now?  has the underlying numbers.

The weaker multiple is likely due to two factors. Firstly, electricity demand has declined due to the Covid-19 pandemic. Per the Short-term energy outlook published by the U.S. EIA, electricity consumption is projected to fall by about 2.4% in 2020 versus 2019. Commercial sales are likely to fall 6.4% this year with demand from the industrial sector projected to fall 6%. Duke’s Q2 2020 Revenue fell by over 7% year-over-year. Secondly, investors have been valuing asset-light growth stocks more richly, and Duke, which posted an average Revenue growth of about 3% per year over the last 2 years and has a mounting debt load ($56 billion in long-term debt as of Q2) has been penalized by investors.

What Are The Catalysts for A Recovery?

However, we see a couple of tailwinds for Duke and the broader utility sector. The Federal Reserve has reduced benchmark interest rates to levels of near-zero and this makes the sizable dividends of utility companies more appealing for yield-seeking investors. Separately, lower interest rates could help Duke reduce its interest burden. With electricity demand quite likely to rise over 2021, and the Fed indicating that interest rates are likely to remain at current levels through at least 2022, the narrative around Duke Energy could change over the next few quarters if there are signs of a demand revival or even if the company posts stronger than expected quarterly earnings, helping its stock price. Specifically, if Duke stock recovers to its February, pre-Covid highs of about $101, there could be an upside of about 23% from current levels.

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