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Stock Analyst Update

Why FirstEnergy Is a Top Utility Pick

We have a high level of confidence that FirstEnergy can separate itself from FES in 2018, and shares are trading at a near-25% discount to our fair value estimate.

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Narrow-moat utility  FirstEnergy (FE) is now one of our top picks in the sector, as the firm trades at an almost 25% discount to our $40 fair value estimate as of late December.

It has now been over one year since FirstEnergy announced its planned separation from FirstEnergy Solutions, or FES, and no major new claims or guarantees have become public. Thus, we have a high level of confidence that FirstEnergy can separate itself from FES in 2018.

However, returning to its regulated past will likely require a big move: allowing FES to fall into bankruptcy. We estimate this could cost shareholders $1.7 billion for FES' unfunded liabilities and other cross-guarantees plus a potential $1 billion settlement with creditors to avoid yearslong litigation. The total of $2.7 billion is included in our fair value estimate. 

The stock is also cheap relative to its peers. FirstEnergy trades at a 30% discount to other fully regulated U.S. utilities as of late December. We think the market is too concerned about the pending FES bankruptcy. Even if FirstEnergy assumes all $3 billion of FES debt, our fair value estimate falls by only about $2 per share. Once FES worries subside and the market revalues FirstEnergy as the fully regulated and narrow-moat utility that it is set to become, investors should realize attractive upside.

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Charles Fishman does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.