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Could FirstEnergy (FE) be a Good Pick for Your Portfolio?

Zacks Equity Research

Even though FirstEnergy Corp.'s FE fourth-quarter 2016 operating earnings of 38 cents per share missed the Zacks Consensus Estimate of 39 cents by 2.6%, four analysts have raised their earnings estimates for 2017, while just one cut the estimate in the last 60 days.

Earnings estimates have risen from $2.71 to $2.78 per share in the same time period, reflecting analysts’ optimism in FirstEnergy’s earnings growth trajectory. FirstEnergy expects EPS in regulated operations to grow at a compound annual rate of 4–6% or 7–9%, including the Ohio Distribution Modernization Rider through 2019, off 2016 weather-adjusted base.

The company’s broadening regulated base and growth in transmission business are expected to boost earnings. The company’s efforts toward expanding its regulated generation mix have lent stability to the company’s earnings trajectory. The last few years saw the company successfully broadening its regulated operations. Moreover, the company has plans of reducing merchant fleet generation in order to cushion itself from market volatilities through asset sales, legislative or regulatory initiatives for generation that recognizes environmental or energy security benefits and financial restructuring.

The company is planning to exit from Competitive Generation by mid-2018 to become a regulated company. FirstEnergy expects EPS in regulated operations to grow at a compound annual rate of 4–6% or 7–9%, including the Ohio Distribution Modernization Rider through 2019, off 2016 weather-adjusted base.

FirstEnergy Corporation Price

FirstEnergy Corporation Price | FirstEnergy Corporation Quote

On the flip side, FirstEnergy’s debt/capital ratio stands at 74.5% compared with the industry average of 48.4% and the S&P 500’s 41.8%. Note that the higher the debt relative to its capital, the higher is the financial leverage and risk of default.

FirstEnergy carries a debt rating of “BBB-” and“Baa3” from the S&P and Moody’s, respectively, with a negative outlook by the former. A negative outlook suggests that the rating agency may further downgrade FirstEnergy’s debt in the future. A downgrade from its present credit rating could raise the company's costs and hurt its ability to access capital.

Zacks Rank and Key Picks

FirstEnergy carries a Zacks Rank #3 (Hold). A few favorably placed stocks in the same space include CenterPoint Energy, Inc. CNP, Spark Energy, Inc. SPKE and Ameren Corporation AEE.

CenterPoint Energy’s estimates for the current quarter have increased from 34 cents to 35 cents in the past 30 days. The stock carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Spark Energy, a Zacks Rank #1 stock, has seen estimates rise from 88 cents to 97 cents in the past 30 days for the current quarter.

Ameren Corp. has seen current-quarter estimates rise from 41 cents to 43 cents in the past 30 days. The stock carries a Zacks Rank #2.

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