Analyzing Duke Energy (DUK) and Southern Company (SO) Ahead of Earnings – Buy or Sell?

Domestic utilities Duke Energy Corporation (DUK) and The Southern Company (SO) are scheduled to release their third-quarter results on November 2. The utilities sector has been one of the worst-performing sectors this year, but what lies ahead for these stocks?

In this piece, I have discussed why it could be prudent to avoid investing in the two utility stocks before their earnings release.

DUK’s EPS and revenue for the quarter ended September 30, 2023, are expected to rise 7.6% and 2.2% year-over-year to $1.92 and $8.14 billion, respectively. On the other hand, SO’s revenue for the third quarter ended September 30, 2023, is expected to decline marginally year-over-year to $8.38 billion. However, its EPS for the same quarter is expected to increase 1% year-over-year to $1.32.

Last year, the Ukraine-Russia war sent shockwaves to the global energy markets. Crude oil and energy prices skyrocketed to record-high levels. Amid a rising interest rate environment, high inflation, and rising crude oil prices, investors sought the safety of utility stocks as they are considered defensive in nature.

However, oil prices have since cooled off significantly, and inflation has also eased considerably from last year’s highs. The S&P 500 Utilities Index has been one of the worst-performing sectors this year, having declined 16.2% year-to-date, on track for its first drop of more than 5% since 2008. The Federal Reserve’s higher-for-longer narrative is weighing on the sector’s prospects.

The higher interest rates make the dividends of utility stocks less attractive to investors when compared to the bond yields. Treasuries, considered risk-free as the U.S. government backs them, are currently yielding more than the dividend yields of utilities. The yields on short-term treasury bonds with maturities of up to two years are currently above 5%, the highest since June 2007.

The lack of investors’ interest in utility stocks can be gauged from the SPDR Select Sector Fund – Utilities’ (XLU) negative 15.7% returns year-to-date. With interest rates likely to remain higher for longer, yield-hungry investors are unlikely to invest in utility stocks anytime soon.

Given the uncertainty around the sector’s prospects, let’s examine the fundamentals of the two stocks from the Utilities – Domestic industry, starting with the one ranked lower from the investment point of view.

Stock #2: Duke Energy Corporation (DUK)

DUK operates as an energy company. It operates through two segments: Electric Utilities and Infrastructure (EU&I) and Gas Utilities and Infrastructure (GU&I). The EU&I segment generates, transmits, distributes, and sells electricity; and uses coal, hydroelectric, natural gas, oil, solar, and wind sources, and renewables to generate electricity. The GU&I segment distributes natural gas and invests in pipeline transmission projects, renewable natural gas projects, and natural gas storage facilities.

In terms of forward EV/EBITDA, DUK’s 11.79x is 11.2% higher than the 10.60x industry average. Likewise, its 5.27x forward EV/Sales is 49.8% higher than the 3.52x industry average. Its 15.68x forward non-GAAP P/E is 1.4% higher than the 15.47x industry average.

DUK’s total operating revenues for the second quarter ended June 30, 2023, came in at $6.58 billion. Its regulated natural gas revenues declined 22.1% over the prior-year quarter to $331 million. The company’s adjusted net income available to DUK common stockholders declined 16.1% year-over-year to $714 million. Also, its adjusted EPS came in at $0.91, representing a decline of 16.5% year-over-year.

Street expects DUK’s revenue for fiscal 2023 to decline 0.5% year-over-year to $28.63 billion. It failed to surpass the consensus EPS estimates in three of the trailing four quarters. The stock has declined 14.7% year-to-date to close the last trading session at $87.90.

DUK’s weak fundamentals are reflected in its POWR Ratings. It has an overall D rating, equating to a Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Within the F-rated Utilities – Domestic industry, it is ranked #44 out of 65 stocks. It has a D grade for Value. To see the additional ratings of DUK for Growth, Momentum, Stability, Sentiment, and Quality, click here.

Stock #1: The Southern Company (SO)

SO engages in the generation, transmission, and distribution of electricity. It operates through segments: Gas Distribution Operations, Gas Pipeline Investments, and Gas Marketing Services. The company also develops, constructs, acquires, owns and manages power generation assets, including renewable energy projects and sells electricity in the wholesale market; and distributes natural gas and provides gas marketing services, distribution operations, and pipeline investment operations.

In terms of forward non-GAAP PEG, SO’s 3.31x is 34.4% higher than the 2.47x industry average. Likewise, its 18.53x forward non-GAAP P/E is 19.8% higher than the 15.47x industry average. Its 13.23x forward EV/EBITDA is 24.8% higher than the 10.60x industry average.

For the fiscal second quarter ended June 30, 2023, SO’s total operating revenues declined 20.2% year-over-year to $5.75 billion. Its net income attributable to SO decreased 24.3% over the prior-year quarter to $838 million. The company’s operating income declined 22.1% year-over-year to $1.29 billion.

Analysts expect SO’s revenue to decline marginally year-over-year to $8.38 billion. The stock has declined 6.5% year-to-date to close the last trading session at $66.79.

SO’s POWR Ratings reflect this bleak outlook. The stock has an overall rating of D, equating to a Sell in our proprietary rating system.

It has an F grade for Value and a D for Growth. It is ranked #37 in the same industry. Click here to see the other ratings of SO for Momentum, Stability, Sentiment, and Quality.

What To Do Next?

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SO shares were trading at $67.17 per share on Tuesday morning, up $0.38 (+0.57%). Year-to-date, SO has declined -3.06%, versus a 9.87% rise in the benchmark S&P 500 index during the same period.

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.

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