Duke ( DUK) is on a yo-yo diet.

Ever eager to win back Wall Street's faith, Duke has pledged to grow leaner. Indeed, the big energy company has announced major layoffs each of the past two years. But even after shedding thousands of employees, the company has seen its head count barely change. Today, Duke is, in fact, just 5% below its heaviest weight ever.

Duke pointed to a big merger in 2002 -- which added more employees than it has managed to trim -- as a reason for its current size. It also indicated that massive asset sales, carried out since that time, have failed to significantly lighten its load.

Still, Wall Street is counting on Duke to slash costs -- partially through head count reductions -- as part of a recovery plan being carried out by turnaround CEO Paul Anderson.

So far, investors have shown plenty of faith in Anderson's ability to save yet another troubled company. They pushed Duke's stock to a 52-week high the same day that Anderson reassured analysts during an upbeat meeting in February. One analyst, who is bearish on Duke's stock, actually questioned his negative stand after that particular conference.

"We walked away from the events with a greater level of confidence that Mr. Anderson has an accurate grasp of what needs to be done to fully get Duke back on its feet," UBS analyst Ronald Barone wrote in early February. "Feeling insecure about our projections given all the upbeat discussion at these meetings, we returned to the office to further update our model."

In the end, Barone concluded that his original projections looked accurate and kept his reduce rating and $18 price target on Duke's stock intact. Almost as an aside, he also recalled some company promises in that same research note.

"Over the last several years," Barone wrote, "management mentioned that Duke's total head count has been reduced by about 4,000 people, with further reductions coming."

But the company's own figures look far less flattering. On Wednesday, Duke added 9 cents, to $22.60.

Duke's Drift
Energy giant says it's cutting, but the staff isn't shrinking
Source: SEC filings

Magic Mirror

Duke began trimming away fat the year after its merger with PanEnergy -- a company once led by Anderson -- in 1997.

Its staff fell by 1,000 in both 1998 and 1999. But it began to swell, along with the merchant energy business, in 2000. It then reached its most bloated state, according to numbers provided by Duke to TheStreet.com, during the merchant energy meltdown of 2002.

The company packed on 5,000 employees through a big merger with Westcoast Energy early that year. Its staff totaled 25,000 -- up 20% in just three years -- as 2002 drew to a close.

But the company itself saw a thinner figure in the mirror.

"To manage the impact of the merchant downturn and a sluggish economy, we have cut costs and downsized across the enterprise," former CEO Richard Priory told the market in January 2003.

The company recorded $70 million in 2002 severance charges -- including $18 million for executives -- even as its overall staff expanded. It then promised further progress in 2003.

"We have realigned our businesses to address current market realities and restructured our management team to lead effectively through these tough times," Priory announced as 2003 kicked off. "Our watchword in 2003 is discipline."

Priory reassured the market halfway through the year.

"We are executing on the strategic directives we laid out in January and operating our businesses with discipline and efficiency," he stated. "Duke Energy is becoming a leaner, stronger and more agile competitor."

But the company would have to deliver more. Last October it hired Anderson to replace Priory and promised to cut costs by an additional $200 million annually. It also announced new severance charges totaling $138 million to cover expenses for employees it had already shed.

At the same time, however, Duke still pegged its global workforce at 25,000 -- even after billions of dollars of asset sales. It did, however, promise to cut 2,000 people from that total. And it went on to celebrate its progress in a conference call last month.

"The reduction in employee head count has exceeded 4,000 since late 2002," Duke Treasurer Myron Caldwell stated during a recent conference in the company's home state of North Carolina.

A net reduction of that size should have left Duke with a staff of just 21,000 -- its leanest ever since Duke became the global energy company that it is today. But Duke's latest annual report, filed just a few days after Caldwell repeated his claims in mid-March, shows otherwise. Even after all the past layoffs and severance charges, Duke still needs to trim hundreds of jobs to hit its workforce target of 23,000. (The company said Thursday that its current employment level is 22,200.)

Anderson already knows that investors are counting on him to meet the company's goals.

"He acknowledged that after first working to stabilize the company, the next step is to regain the Street's confidence by fully delivering on 2004 expectations," Barone noted.

Conflicting Views

Some analysts have already detoured away from the bearish majority and chosen to look on the bright side.

Kit Konolige of Morgan Stanley sounded decidedly upbeat after reading Duke's recent annual report. He determined that some smaller asset sales, coupled with Duke's big divesture in Australia, had already pushed the company past its goal for all of 2004.

"These sales were not announced and likely present upside to consensus thinking regarding Duke's 2004 debt paydown and its timing," wrote Konolige, who has an overweight rating and a $24 price target on Duke's stock.

Last week, CIBC analyst Matthew Akman followed by initiating coverage on Duke with an outperform rating. Akman, who values Duke at $25 a share, believes the stock deserves to trade at a premium because of the company's future earnings potential, its generous dividend and its "premium" regulated assets. He is, however, banking on a power market recovery that may not materialize anytime soon.

"We think that the consensus outlook for U.S. power markets is too negative," Akman explained. "The rapid pace of economic growth and power plant cancellations are accelerating the move back to equilibrium."

Akman is convinced that Duke Energy North America, the company's money-losing merchant division, will at least break even within the next three years. But he hints that Duke's stock could suffer if he is wrong.

"Upward movement in Duke shares now depends on a significant earnings recovery," he stated. "DENA holds the key to such a recovery, because the regulated pipeline and utility businesses will probably generate relatively modest growth."

In the meantime, Barone cannot get excited. He even questions why others around him can.

"We believe investor psychology continues to run well ahead of itself on this name," Barone wrote in February. "We continue to view its shares as overvalued on virtually every valuation parameter and thus continue to suggest caution at current levels."

As originally published, this story contained an error. Please see Corrections and Clarifications.

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