Why Is Argus Ditching Its Buy On Duke Energy?

Shares of Duke Energy Corp DUK have gained 11 percent year-to-date. Argus’ Gary Hovis downgraded the rating for the company from Buy to Hold, citing valuation as the reason, since the company’s shares are now trading at a price less than 10 percent from the former price target of $86.

Following the recent upturn, there seems to be an “unexciting total return potential” for Duke Energy’s shares over the next 12 months, despite the company’s strong fundamentals, including “constructive regulation and an expanding rate base,” analyst Gary Hovis said.

Brazil Performance

Duke Energy’s International Energy segment generated adjusted earnings of $225 million in 2015, significantly below the $428 million generated in 2014. “Unfavorable foreign currency exchange rates, and higher purchased power costs in Brazil, which resulted from customers’ lower usage of less-expensive hydro-power due to extreme drought conditions hurt results,” Hovis wrote.

The EPS estimate for 2017 has been reduced from $4.85 to $4.80, since earnings from the company’s International Energy segment are expected to continue to be under pressure due to decelerating demand in the Brazilian service area, caused by drought conditions, as well as continued unfavorable forex headwinds.

Acquisition Of Piedmont Natural Gas

In October 2015, Duke Energy had entered into an agreement to acquire Piedmont Natural Gas Company, Inc. PNY for approximately $4.9 billion in cash. Duke Energy will also assume about $1.8 billion in existing debt. Duke Energy expects the deal to be earnings accretive in the first full year after the completion of the deal, which is expected by the end of 2016.