FirstEnergy Investments To Boost Growth Amid Debt Burden

FirstEnergy Corporation’s (NYSE:FE) broadening regulated base and growing transmission lines are expected to boost performance. In addition, the company’s systematic investment to strengthen its infrastructure is a key factor for its success. However, its debt levels are much higher than the industry standard and are a concern amid the rising interest rate environment.

FirstEnergy’s earnings per share in the first quarter were higher than the Zacks Consensus Estimate and the company guidance. This was primarily due to strong results from all three business units.

The company’s efforts to expand its regulated generation mix have lent stability to its earnings trajectory. The last few years saw it successfully broadening its regulated operations. FirstEnergy is planning to exit the Competitive Generation by mid-2018 to fully transition to a regulated company.

FirstEnergy’s modernization drive will boost its service reliability and lead to customer retention. The company is on track to invest nearly $1 billion in 2017 and $4.2 billion over the 2014–2017 time period.

However, the company’s debt/capital ratio stands at 74.3% compared with the industry average of 49.7% and the S&P 500’s 41.9%. Its current ratio is 0.36, way below the S&P 500 level of 1.31. Note that the higher the debt relative to its capital, the higher the financial leverage and risk of default.

FirstEnergy’s nuclear operations are subject to compliance with various health and environmental mandates, which increases costs of running such plants. Further, the nuclear plants run the risk of unplanned outages, adversely affecting production volumes.

Price Movement

Shares of FirstEnergy have lost 11.4% in the last 12 months against the Zacks categorized Utility-Electric Power industry gain of nearly 2.6%.

FirstEnergy’s debt/capital ratio stands at 74.3% compared with the industry average of 49.7% and the S&P 500’s 41.9%. Note that the higher the debt relative to its capital, the higher the financial leverage and risk of default

Zacks Rank & Stocks to Consider

FirstEnergy currently has a Zacks Rank #3 (Hold).

Investors can consider better-ranked stocks from the same industry like Avangrid, Inc. (NYSE:AGR) , Brookfield Infrastructure Partners LP (NYSE:BIP) and UNITIL Corp. (NYSE:UTL) . All the three stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Avangrid reported a positive earnings surprise of 7.35% in the first quarter of 2017. Its 2017 estimates have risen by 0.5% to $2.21 per share in the last 60 days.

Brookfield Infrastructure Partners LP reported a positive earnings surprise of 0.79% in the last four quarters. Its 2017 estimates have risen by 2.5% to $3.22 per share in the last 60 days.

UNITIL Corporation reported a positive earnings surprise of 2.33% in the first quarter of 2017. Its 2017 estimates have risen 1.0% to $2.09 per share in the last 60 days.

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