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3 Reasons Duke Energy Corporation Stock Could Rise

By Reuben Gregg Brewer - Mar 4, 2016 at 9:45AM

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Duke is one of the largest U.S. utilities, with a growing position in regulated markets... Here's what could take it to the next level

Duke Energy Corporation (DUK 0.89%) has been refocusing its business. That's put it in a solid position to grow its top and bottom lines though investing in its own assets and acquiring others. This is the backstop behind these three reasons Duke Energy stock could rise.

1. Regulated businesses are more predictable
Duke operates in three distinct areas -- regulated utilities, international energy, and non-regulated utilities, or independent power production. Of the three, the regulated business is by far the most predictable. Just a few years ago, only around two-thirds of its business was regulated, but after acquiring Progress Energy in mid-2012 that number has increased materially. Today it's around 90%.

Duke's business in pictures. Source: Duke Energy.

So the more predictable side of the utility has grown. Which, in turn, means that the more volatile businesses have shrunk in importance. But Duke has been working its portfolio in other ways, too. For example, it sold 11 non-regulated power plants to Dynergy (NYSE: DYN) last year for $2.8 billion. So the company's pivot toward regulated businesses is twofold. It's worth noting, too, that Duke recently announced plans to shrink or sell its international business. That would make regulated assets an even bigger piece of the total.

As the benefit of these changes becomes more apparent via increasingly predictable performance, investors are likely to reward Duke with a higher share price. Of course that assumes that Duke continues to run its regulated business well and, perhaps more important, continues to invest in the business so that it can increase rates (more on this below). Indeed, augmenting the regulated business alone isn't enough, but it does provide the foundation for more predictable results.  

2. Duke is buying growth
Based on the Progress Energy purchase it's pretty clear that Duke is willing to grow its reach through acquisitions. It's not done. For example, it's in midst of buying Piedmont Natural Gas (PNY) for around $5 billion. This is notable on two fronts.

First, adding Piedmont will make Duke a larger company. Moreover, Piedmont's business is 90% regulated. So it will continue the push toward a more stable business while at the same time expanding Duke's top line and, if all goes as planned, the utility expects it to add to the bottom line from day one, too.

The second reason this is an important deal is that it expands Duke's position in natural gas. This is an increasingly important fuel source in the United States. And it presents an organic growth opportunity in an industry where growth can be hard to come by.

So, Duke's acquisition of Piedmont, assuming the transaction goes smoothly, could lead investors to afford the giant utility a higher price. But longer term, this deal is also a clear indication that Duke plans to maintain its leadership role in the utility market, using acquisitions to position itself for a better future.

Where Duke is putting its cash. Source: Duke Energy

3. Utilities spend money to make money
That said, one of the core ways that a regulated utility grows its business is through investment. Essentially, utilities build new power plants and upgrade existing assets, and then regulators allow them to pass those costs on to customers plus a little more for the effort.

Duke is planning on spending around $20 billion between now and 2019. Most of that's going to occur in its regulated businesses. The acquisition of Piedmont might even increase that amount once the deal is consummated. As this spending leads to higher revenues and earnings investors are likely to push Duke's stock higher.

Interestingly, however, the utility is also making some changes in its non-regulated business. The 11 plants noted above that were sold to Dynergy were all carbon based, five were fired by coal, one used oil, and the rest natural gas. Duke is increasingly focusing on renewable power in its non-regulated operations, which at just 5% of the company's business isn't a huge contributor. But Duke is clearly moving toward in-demand power production for which it can get long-term contracts. This is a sleeper issue, but spending the time and money to build renewable power could turn a once-concerning and volatile businesses into a consistent money maker.

Is higher in the future?
Regulated utilities are pretty boring businesses, in general. But they are predictable. Over the past few years Duke has been working hard to get more and more predictable. As investors begin to appreciate that fact the utility's shares are likely to be rewarded. But that's not the only issue to watch here. The Piedmont purchase is a clear near-term catalyst, and the company's big spending plans should help push results higher, as well. All three, then, are issues that could lead Duke's stock higher.

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Duke Energy Corporation Stock Quote
Duke Energy Corporation
$110.81 (0.89%) $0.98
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Piedmont Natural Gas Co. Inc.

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