Earnings Preview: FirstEnergy Corp.

Zacks

FirstEnergy Corporation (FE), a diversified energy company involved in the generation, transmission and distribution of electricity as well as other energy-related services, is slated to release its second-quarter 2012 earnings results before the market bell on August 7, 2012.

Recap, First Quarter-2012

FirstEnergy reported earnings of 82 cents per share in the first quarter of 2012, missing the Zacks Consensus Estimate by a penny but comfortably surpassing the year-ago earnings of 75 cents per share. Higher contribution from the Allegheny Energy companies and a decline in operating expenses resulted in the positive earnings outcome. This was partially offset by lower distribution deliveries caused by mild weather and a decline in commodity margins.

Revenue in the said quarter increased to $4.1 billion from $3.6 billion in the year-ago quarter. However, revenue fell short of the Zacks Consensus Estimate by $32 million.

The top-line growth was largely attributed to synergies from the Allegheny merger, which mitigated lackluster sales in all customer classes. While industrial sales were flat in the reported quarter, residential and commercial sales declined jointly by 10% year over year.

Guidance 2012

FirstEnergy maintained its operating earnings expectation for 2012 and 2013 in the range of $3.30 per share to $3.60 per share and $3.10 per share to $3.40 per share, respectively. GAAP earnings are anticipated in the range of $2.85-$3.15 per share for 2012 and $2.92 -$3.22 per share for 2013.

Zacks Consensus

The Zacks Consensus Estimate for the second quarter 2012 is 64 cents per share, flat with the earnings reported in the comparable quarter, last year. At present, the Zacks Consensus Estimate for earnings ranges from 60 cents per share to 71 cents per share.

For full-year 2012, the Zacks Consensus Estimate is $3.39 per share, down from $3.62 per share recorded in the prior year. The current Zacks Consensus Estimate ranges between $3.20 per share and $3.46 per share.

Estimate Revisions Trend

Agreement

We witness quite a few estimate revisions at this point. Among the total 10 estimates, 3 estimates moved downwards while 2 estimates moved up in the past 30 days for the second quarter. For the said quarter, none of the estimates moved in the last 7 days.

For 2012, 2 out of the 14 estimates moved downwards while 1 estimate moved north in the past 30 days. The last 7 days observed no revisions to the estimates.

Magnitude

The Zacks Consensus Estimate for the second quarter declined by 2 cents in the last 30 days while it remained static for the past 7 days. For full-year 2012, the consensus estimate dropped by a penny in the past month with no movement in the past week.

Surprise History

With respect to earnings surprise, the company’s performance was mixed in the last four quarters. The results of the company surpassed our expectation in two of the last four quarters, while earnings fell short of expectation in the other two quarters.

The earnings surprise in the last four quarters ranged from (11.1%) to 8.9%. The average surprise over the last four quarters remained a negative 0.51%. 

Our Recommendation

FirstEnergy’s diverse operations lend constancy to its stock profile and with the projected increase in energy consumption in the US market, the company is expected to witness potential growth. In addition, the company’s effective transition to the deregulated markets external to its primary service territory will act as a positive growth driver.

The FirstEnergy-Allegheny merger will provide significant stimulus to its top line in the coming years. Besides, the company’s continual investment activities and successful execution of its retail strategy through hedging or selling forward are expected to provide a stable earnings stream.

However, regulatory risks could result in higher capital expenditures and increase in operation costs, thereby impacting margins. Other negatives include commodity price fluctuations, rise in the prices of key fuel inputs without an offsetting rise in power prices and weather irregularities.

FirstEnergy operates in a highly competitive energy market and faces intense competition from companies like American Electric Power Company Inc. (AEP) and Dominion Resources Inc. (D).

Currently, we are maintaining a long-term Neutral recommendation on FirstEnergy Corp. The company has a Zacks #3 Rank implying a short-term Hold rating on the stock.

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