Most analysts love Duke Energy, which has an average rating of buy. But there's reason to believe the stock may be overvalued at today's price of $108.28 per share. Let's look at the fundamentals ourselves and see if we reach a different conclusion than the analyst community.
Duke Energy has a P/E ratio of 19.4 based on its 12 month trailing earnings per share of $5.57. Considering its future earnings estimates of $6.34 per share, the stock's forward P/E ratio is 17.1. In comparison, the average P/E ratio of the Utilities sector is 20.52 and the average P/E ratio of the S&P 500 is 29.3.
We can also compare the ratio of Duke Energy's market price to its book value, which gives us the price to book, or P/B ratio. A company's book value refers to its present equity value -- or what is left over when we subtract its liabilities from its assets. DUK has a P/B ratio of 1.74, with any figure close to or below one indicating a potentially undervalued company.
A comparison of the share price versus company earnings and book value should be balanced by an analysis of the company's ability to pay its liabilities. One popular metric is the Quick Ratio, or Acid Test, which is the company's current assets minus its inventory and prepaid expenses divided by its current liabilities. Duke Energy's quick ratio is 0.29. Generally speaking, a quick ratio above 1 signifies that the company is able to meet its liabilities.
Now we turn to the actual cash that Duke Energy has on hand after all of its inflows and outflows of capital have been accounted for -- including non business related items such as the cost of maintaining its debt. This final bottom line is called levered free cash flow, and for Duke Energy it stands at -$2.73 Billion. This negative cash flow could mean the company may not be able to sustain its 3.8% dividend for much longer.
At Market Inference, we will keep monitoring Duke Energy to see if the analysts were right to recommend the stock despite its valuation issues. We recognize that numbers don't always tell the whole story, and that qualitative factors often set high performing investments apart from the rest.
