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FirstEnergy's Focus on Modernization, Steady Outlay Bode Well

Zacks Equity Research

FirstEnergy Corporation’s FE efforts to expand its regulated generation mix have provided stability to the company’s earnings trajectory.

Earnings estimates for the company been revised upward in the past 30 days, reflecting analysts’ optimism in the stock. The Zacks Consensus Estimate for 2019 and 2020 earnings have both inched up 0.4% to $2.51 and $2.47 per share, respectively.

Let’s take a look at the factors that are driving the Zacks Rank #2 (Buy) utility company. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Systematic Investments

The company aims to spend nearly $6.2-$6.7 billion to strengthen its distribution network in the 2018-2021 time period.Based on this capital plan, the company expects Regulated Distribution’s rate base growth rate at approximately 5% from 2018 through 2021.

The company through its Energizing the Future plan aims to upgrade and expand its regulated transmission capabilities. This includes Regulated Transmission operation and the company has plans to invest $4.8 billion in capital from 2018 to 2021. Additionally, FirstEnergy targets to invest $1.2 billion annually through 2021. These investments are expected to result in Regulated Transmission rate base growth of around 11% through 2021. The company expects to recover more than 80% of these capital investments.

Focus on Modernization

FirstEnergy’s modernization drive will boost its service reliability and lead to customer retention. In Ohio, the company has started to implement the $516-million three-year Grid Modernization program, which was approved by the Public Utilities Commission in July. This includes installation of 700,000 smart meters.

Earnings Surprise Trend & Long-Term Growth

FirstEnergy has surpassed the Zacks Consensus Estimates for earnings in the last four quarters, the average being 2.87%. The company’s long-term (3-5 years) earnings growth rate is pegged at 6%.

Dividend Yield & Return on Equity (ROE)

The company is rewarding shareholders through dividend payouts since 2011. Currently, the company has a dividend yield of 3.27% compared with the Zacks S&P 500 composite’s 1.82% and the industry’s 3.01%.

FirstEnergy has an ROE of 19.21%, higher than the industry’s average of 9.47% and Zacks S&P 500 composite’s 17.41%. This indicates the company’s efficiency in utilizing shareholders’ funds.

Price Movement

In the past 12 months, FirstEnergy’s shares have rallied 24.9% compared with the industry’s growth of 17.6%.

Stocks to Consider

Some better-ranked stocks from the same industry are Eversource Energy ES, American Electric Power Company, Inc AEP and Fortis Inc FTS. All the three stocks hold a Zacks Rank #2 (Buy).

Long-term earnings growth of Eversource, American Electric Power Compan and Fortis is pegged at 5.6%, 5.6% and 5.7%, respectively.

Eversource, American Electric Power Compan and Fortis delivered an average positive earnings surprise of 2.39%, 5% and 4.14% in the last four quarters, respectively.

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