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Duke Energy Corporation
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By BuildMWell
February 15, 2005

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Smith Barney has finally seen the light:

"Duke Energy upgraded on increased confidence in outlook (DUK)"

Duke Energy has been upgraded to "buy" from "hold" at Smith Barney due to increased confidence in the company's ability to grow its business and shareholder value. The analyst says that this is because the financials are at last stable.

Heck, I have been saying that for almost two years! I claimed that the financials were never in doubt due to Duke's great nuclear business that makes money every minute of every day.. Anyway, I will take anything I can get from these guys. I like what they see for the future:

They look for the stock price to rise to $30/share which is a nice bump from their old target of $26/share...of course, we are already at $27/share, but who's counting?

Their 2005 earnings forecast is $1.60/share, up from $1.55 and their 2006 earnings estimate is $1.85 a share, up from $1.65/share.

Raising their forecast is a nice touch, but the thing that strikes me is the change in the percent rise in estimated earnings year over year. Going from $1.60 to $1.85/share is a 15.9% boost in earnings for Duke Energy. That is very impressive for a business that is growing at an average 7% CAGR for the last 30 years.

The old forecast for an earnings increase from $1.55 to $1.65 showed a Y/Y increase of just 6.5% which was too low. Not that the $1.85/share is wrong, but I think the longer-term Y/Y growth in earnings cannot be as great as 15%. For instance, if Duke makes the $1.85/share in 2006, then the expectation might be for $2.13/share in 2007 and $2.45/share in 2008. That bodes well for a dividend bump and a stock price of over $45/share. Duke Energy will be back to it's old self again. I like that picture.

The problem, as I see it, is that Duke has never stopped making about $2.00/year in earnings, their books failed to show it because of the write-off of the merchant power debacle...but the earnings were still there, paying for Duke management's screw-up. Thus, a return to $2.00/share earnings is fully expected...it is what happens after that point that is of real interest to me.

It appears to me that we are seeing a return of legitimate earnings expectations based on the last three years of under-performance. That can be very deceiving and the price of the stock can easily go too high based on the short-term growth spurt. In fact, there is no earnings growth spurt...just a return to the old profitability levels. Let's make sure we do not fall prey to the appearance of something that is not, in fact, a reality. The market gets fooled this way over and over again. Let's be smarter than that.

Anyway, I think that the future is bright for Duke Energy and I do not want to take anything away from the nice price appreciation that should occur in the next two years. The key is to see how fast it occurs. Everyone seems to be jumping onto the DUK bandwagon right now. The positive hype is about to begin in full force. If the price goes too high too fast, a collapse will be in the works once again.

We need to be on our toes with Duke Energy.


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