FirstEnergy: Shares Are Fairly Valued With A Near-Term Bullish Chart (NYSE:FE)

As Coal Plants Close In Ohio, Residents Face The Fallout

Stephanie Keith/Getty Images News

Somebody flipped off the light switch on the Utilities sector. Along with the rate-sensitive niche of Real Estate, the “utes” area has been among the worst spots to be positioned during the recent downturn in the S&P 500. One electric utility headquartered in Ohio looks fairly valued with a bullish near-term chart setup.

Two Defensive Sectors Are No Long Safe

Two Defensive Sectors Are No Long Safe

Goldman Sachs Investment Research

According to Bank of America Global Research, FirstEnergy Corporation (NYSE:FE) is a pure-play regulated electric utility conglomerate of transmission & distribution (T&D) assets. The company has more than six million customers across six states (OH, PA, NJ, WV, and MD primarily) with a 10-distribution company footprint. FE also owns 3 transmission utilities regulated by FERC with oversight from state utility regulators.

The Ohio-based $20.6 billion market cap Electric Utilities industry company within the Utilities sector trades at a near-market price-to-earnings ratio of 15.5 using its last 12 months of GAAP earnings and pays a high 4.2% dividend yield, according to The Wall Street Journal.

The company has pulled back significantly since its foibles with Ohio legacy generation assets began. A new earnings multiple now looks slightly more favorable, but heightened risks with FE might warrant its below-industry P/E. On the upside, the company has a relatively strong transmission business which could be a potential sale candidate, per BofA. Downside risks include unforeseen regulatory changes, its pension liabilities, ongoing utility investigations, and uncertain capex needs amid rising interest rates.

On valuation, BofA analysts see earnings having fallen about 8% this year but EPS should bounce back by 4% next year and nearly 7% in 2024. Those figures are not far from the Bloomberg consensus estimates.

Dividends are seen as steady this year, then bumping up through 2024. FirstEnergy’s operating P/E ratio should remain in the mid-teens, which is not indicative of a strong value. Moreover, an EV/EBITDA multiple in the low to mid-teens is not cheap. Finally, free cash flow is negative, but that is not uncommon for a utility.

Overall, the valuation seems fair; not too high or low.

FirstEnergy: Earnings, Valuation, Dividend Forecasts

FirstEnergy: Earnings, Valuation, Dividend Forecasts

BofA Global Research

Looking ahead, corporate event data from Wall Street Horizon show an unconfirmed earnings date of Thursday, Oct. 27 AMC. The stock trades ex-div on Nov. 4.

Corporate Event Calendar

Corporate Event Calendar

Wall Street Horizon

The Technical Take

FirstEnergy has pulled back sharply from its Q3 peak near $50. Shares retreated to support around $35 after a summer rally from that spot to $42. Notice in the chart below that there were telltale signs of a break lower on FE – bearish negative divergence took place on the RSI indicator up top as shares rose during August and September.

A rout in the sector took FE with it. Now, though, the chart suggests a favorable risk/reward play. Going long with a stop under the October 2021 and June 2022 low of $35 makes sense.

The longer-term trend could be reversing down, however. FE’s 200-day moving average is now negatively sloped after rising for the last year. Bulls should consider selling into rallies – perhaps on an approach of $42.

FE: Shares Fall To Support After A Weak Summer Rally

FE: Shares Fall To Support After A Weak Summer Rally

Stockcharts.com

The Bottom Line

FirstEnergy looks fairly valued while growth prospects are not encouraging. The stock’s chart illustrates a good near-term risk/reward play, but long-term investors might want to look elsewhere for a better value pick despite the stock’s high dividend yield.

Be the first to comment

Leave a Reply

Your email address will not be published.


*