Morgan Stanley Upgrades FirstEnergy To Overweight; Sees Potential Sale Of Generation Business

FirstEnergy Corp. FE shares have underperformed year to date, trading 12 percent below its integrated peers.

Morgan Stanley’s Stephen C. Byrd upgraded the rating on the company from Equal Weight to Overweight, while raising the price target from $38 to $41.

Sale Likely

Byrd explained that the upgrade was based on the stock’s year-to-date underperformance, as well as management’s indications of potential strategic activity at the generation business.

Reasons For Potential Sale

Mention that FirstEnergy had indicated that it might “ultimately spin off or sell its generation business,” the analyst stated that there were five key drivers, including the company’s “prohibitively high” equity needs if the business was to be retained, the earnings contribution of the business becoming “negligible over time,” very low probability of the business receiving a long term contract in Ohio and the generation business being “sub-scale.”

Related Link: FirstEnergy Downgraded At Goldman Sachs, Expects Large Equity Offering

Synergy Potential

Byrd believes the synergy potential could be significant if this business were to merge with another generation business, “especially one that lacks FE's retail energy marketing capabilities.”

The analyst also noted that FirstEnergy has made numerous statements during its 2Q16 earnings call that indicate that the merchant generation assets were inconsistent with the company’s strategy.

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