FirstEnergy Stays Neutral

Zacks

We reiterate our Neutral recommendation on FirstEnergy Corporation (FE) taking into account its first quarter 2012 performance which missed both our top and bottom line expectations.

The government’s recent take on imposing stringent environmental and federal laws relating to emissions and nuclear safety could adversely affect FirstEnergy operations. Also, a rise in key fuel inputs required to maintain competitiveness as well as disruption in fuel supplies could hurt its profitability.

FirstEnergy has the nation's largest investor-owned electric system. The company’s high profile merger with Alleghany closed in the first quarter of this year. This merger is a strategic fit designed to reap substantial benefits for the company in the medium to long term.

On the positive side, the company aims to continuously expand its infrastructure portfolio through investments to stimulate its growth engine. FirstEnergy anticipates a rising customer base would offer operational flexibility and hence add to earnings.

Its commitment towards sustaining a strong balance sheet position and financial discipline will aid in the smooth function of its investment projects. It would finance its construction expenditures as well as other interest and dividend payments.

We are also optimistic that successful execution of its retail strategy through hedging or selling forward to its retail customers and shift of sales volume within and among the sales channels would entail additional benefits for the company in the coming years.

On the flip side, other negatives that could affect FirstEnergy’s stock positions include extreme weather irregularities and risks resulting from interest rate instability and commodity price fluctuations of electricity, natural gas, coal and energy transmission. It could have undesirable impact on margins.

FirstEnergy maintained its earnings guidance in the range of $3.30 to $3.60 per share for 2012 and $3.10 to $3.40 per share for 2013. The Zacks Consensus Estimates for the second quarter and fiscal 2012 are currently pegged at 66 cents per share and $3.40 per share, respectively.

FirstEnergy presently retains a Zacks #3 Rank which translates into a short-term Hold rating. The company’s peers include Dominion Resources Inc. (D) and American Electric Power (AEP).

Based in Akron Ohio, FirstEnergy Corporation is a diversified energy company. Through its subsidiaries the company is engaged in generation, transmission and distribution of electricity, as well as energy management and other energy-related services.

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