Wachovia analyst: swap out of Duke 8.25% mandatory into new 8%

By Ronda Fears

Nashville, Tenn., July 11 - Duke Energy's common stock fell recently following an investment bank's rating downgrade and lower earnings forecast, but Wachovia Securities, Inc. analysts suggest it is still a good story. And the firm recommends Duke's new 8% mandatory over the older 8.25% issue.

On Wednesday, Duke Energy closed down 10.5% after another investment firm cut the stock rating to hold from buy and reduced its forecast EPS to $2.37 from $2.66 for 2002 and to $2.68 from $3.00 for 2003.

The stock rebounded Thursday by $1.95, or 7.5%, to $27.95. The 8% mandatory closed up on the NYSE by 0.95 point to 20.9 and the older 8.25% mandatory ended up 0.98 point to 20.4.

Thomas Hamlin, a merchant power and utilities analyst at Wachovia Securities, believes it is too early to "throw in the towel" as the all-important third quarter is off to a good start. Hamlin's estimates remain above the Street consensus at $2.80 for 2002 and $3.15 for 2003, versus the consensus estimates of $2.69 for 2002 and $2.95 for 2003, according to a report dated Wednesday by Hamlin.

"We still contend that holders of DKE, the older Duke Energy mandatory, swap into DUR, the newer mandatory, due to DUR's relatively more attractive standstill return and valuation," according to a report dated Thursday by Kimberlee Brody, a convertible analyst at Wachovia Securities.

"However, DUR's negative 32 bps standstill pickup and limited downside protection (87%) make the common stock a viable alternative for investors seeking exposure to Duke Energy, save those with a convertible mandate."

With the 8% mandatory at 19.42 and the stock at $26, both Wednesday's closing prices, it is 2.97% rich to theoretical value and has a 4.20% standstill return, or 32 bps below the common stock, according to Brody's report. The firm estimates upside participation at 65% and downside participation at 87%.

By contrast, the old 8.25% mandatory at 19.95 and the stock at $26, it is trading at a 5.65% premium to estimated theoretical value and has a negative 206 bps standstill pickup versus the common stock, according to Brody's report. The firm estimates upside participation at 60% and downside participation at 98%.

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