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FirstEnergy (FE) Gains on Investment Amid Aging Infrastructure

FirstEnergy Corporation FE has been gaining from its transition to become a fully regulated utility company and systematic investments to strengthen infrastructure. Efficient debt management and the ‘Energizing the Future’ plan to expand transmission capability are likely to drive its performance over the long run.

However, the breakdown or failure of equipment or processes due to the aging infrastructure can adversely impact profitability. FirstEnergy currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

FirstEnergy’s long-term (three to five years) earnings growth is currently pegged at 6.7%. The Zacks Consensus Estimate for 2023 earnings per share (EPS) suggests 5.3% growth from the 2022 estimated figure. Moreover, FE’s current dividend yield of 4% is better than the industry’s average of 3.2%.

Tailwinds

Strategic investments help FirstEnergy serve its six million customers more efficiently. In the past several years, the regulated distribution segment experienced rate base growth through systematic investments.

FE expects to invest $17 billion in the 2021-2025 period, of which $8.6 billion will be directed toward grid modernization and increasing resiliency, $1.7 billion for conservation and $6.5 billion for a clean energy transition and customer-centric growth projects. Strengthening transmission assets will allow the company to transmit electricity even during adverse weather conditions.

FirstEnergy’s long-term debt and other long-term obligations as of Jun 30, 2022 were $20,763 million, down 6.7% from $22,248 million on Dec 31, 2021. The times interest earned (TIE) ratio at the end of the second quarter of 2022 was 2.4. A TIE greater than one reflects the firm’s ability to meet debt obligations in the near future without difficulties.

FirstEnergy is focused on lowering emission levels and has undertaken initiatives for the same. In November 2020, it had updated the target to become 100% carbon neutral by 2050, with a mid-term goal of a 30% reduction in greenhouse gases within direct operational control by 2030 from the 2019 level. Also, it plans to electrify 30% of the vehicle fleet by 2030 and further 100% by 2050.

Headwinds

Although FirstEnergy keeps investing in development opportunities to strengthen its transmission operations, the timely completion of projects within budget might not be possible.

The existing coal-fired generating plants, the breakdown or failure of equipment or processes due to the aging infrastructure and an adverse impact of severe weather conditions can lower energy deliveries, thereby impacting operating and financial results. To meet the conditions of stringent rules and regulations and maintain cyber security, FirstEnergy needs to bear additional costs.

Price Performance

In the past three months, shares of FirstEnergy have rallied 2.6% against the industry’s decline of 3.3%.

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Zacks Investment Research


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Stocks to Consider

Some better-ranked stocks from the same industry include The AES Corporation AES, AVANGRID Inc. AGR and Alliant Energy Corporation LNT, each carrying a Zacks Rank #2 (Buy).

The long-term (three to five years) earnings growth rate of AES, AVANGRID and Alliant Energy is projected at 8.3%, 5.9% and 6.2%, respectively.

The Zacks Consensus Estimate for 2022 EPS of AES, AVANGRID and Alliant Energy has moved up 5.9%, 5.1% and 6.5%, respectively, year over year.

AES, AGR and LNT delivered average earnings surprises of 4.2%, 17.9% and 5.8%, respectively, in the last four quarters.


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