FirstEnergy Held in Balance - Analyst Blog

On May 30, we have issued an updated research report on utility operator FirstEnergy Corp. FE. The company's heavy investments aimed at infrastructure modernization will boost its service reliability and lead to customer retention.

In 2014, the company plans to shell out $3.3 billion for asset development initiatives. FirstEnergy's big ticket project, Ohio Smart Modernization project which is nearing completion will likely offer superior quality services to its customers.

However, stringent pro-environment regulations could impose cost pressure leading to margin constraints. Recently, the Obama administration rolled out its plan to cut carbon-dioxide emissions from power plants by 30% by 2030. The rule, which will likely be finalized next year, could prove to be a setback for FirstEnergy's coal-fired generation units.

FirstEnergy, a Zacks Rank #3 (Hold) stock, posted unfavourable financial results in the first quarter of 2014 with the bottom line trailing the Zacks Consensus Estimate. On a year-over-year basis, revenues increased 13.5% while earnings plunged 48.7% due to a challenging competitive business which offset the positive contributions from distribution and transmission business.

Going ahead, the gradual economic recovery in FirstEnergy's service territories could act as a catalyst to sales. The combination of rising electric deliveries and a stable customer portfolio will support its revenue stream.

Moreover, the company's strong cash generating capability will amply fund its future investments. The first quarter of 2014 saw a sharp 84% year-over-year increase in operating cash flow to $92 million.

However, volatility in commodity prices might continue to act as a headwind. Moreover, operational disruption related to breakdown of equipment and risks of accidents could undermine the company's performance.

Key Picks from the Sector

Other better-ranked utility players include NRG Energy Inc. NRG, Korea Electric Power Corp. KEP and CPFL Energia S.A. CPL. All these stocks currently carry a Zacks Rank #1 (Strong Buy).