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Stock Strategist

Brighter Future for FirstEnergy

We think the shares still have room to run following the FES resolution.


The recent agreement with FirstEnergy Solutions allows  FirstEnergy (FE) to avoid years of litigation separating itself from its bankrupt merchant unit. FirstEnergy can now focus on accelerating investments in its wide- and narrow-moat businesses (now 90% of earnings) that should result in strong earnings growth and put it in position to begin increasing its common dividend.

Because of these factors, we think FirstEnergy should trade more in line with its regulated utility peers with economic moats. At 14.6 times our 2019 EPS estimate, FirstEnergy’s shares trade meaningfully below this peer group. In our U.S. utilities coverage (excluding FirstEnergy), the median forward price/earnings multiple of utilities with narrow or wide moats is currently 18.5 times. We believe solid earnings growth and a growing dividend will be the catalysts for the market valuing FirstEnergy’s shares more in line with this peer group.

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

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