Goldman Sachs & Co. LLC analysts on March 28 downgraded Duke Energy Corp. to "sell" from "neutral," citing high leverage levels expected to drive future equity needs and valuation.
Goldman lowered EPS estimates for 2018, 2019 and 2020 to $4.58, $4.74 and $4.85, respectively, from $4.60, $4.79 and $5.01. Goldman also cut its target price for Duke Energy to $78 from $84, implying a total return of 6%, compared to 15% for the bank's utility coverage universe.
Goldman's new forecast assumes Duke Energy will issue roughly $5.5 billion in equity between 2018 and 2020, or roughly 10% of the company's market capitalization, in order to improve funds from operations-to-debt levels to nearly 13% and to keep net debt-to-EBITDA metrics closer to 5.7x to 5.8x. The negative impact of tax reform on Duke Energy will result in lower cash flows due to higher drag from the parent company, in Goldman's view, and less cash taxes shielded as a result of the lower tax rate.
Goldman analyst Michael Lapides forecast a 2018-2020 EPS compound annual growth rate for Duke Energy of 3%, below the company's guidance of annual EPS growth between 4 and 6%.
Although Duke Energy plans to issue $2 billion in equity in 2018, Goldman analysts anticipate Duke may need greater incremental equity in the next two to three years to achieve credit metrics closer to peer levels.
Duke Energy's peer large cap utilities maintain net debt-to-EBITDA ratios near 5x for 2018, according to the report. For Duke Energy to achieve that level by 2020, it would have to issue $11.5 billion of new common equity in 2019 and 2020, or roughly 22% of its market capitalization, to pay down debt. Another route to that leverage ratio would be if Duke's adjusted EBITDA increases to $12.85 billion in 2020, above Goldman's forecast of $11.35 billion.