First Energy Corporation (FE) has recently reported Q1 2019 results witnessing flat revenues Y/Y that resulted in a significant decline in bottom line earnings. Although comparative analysis of FE's valuation metrics suggests that the stock is possibly overvalued at current prices and the share price growth may slow down at these levels, and this view is also strengthened by FE's technical analysis. Nevertheless, FE's "energizing the future" initiative would provide room for suitable upside in the medium-to-long term. Let's get into the details.
FE's Q1 2019 revenues came out at $2.9 BB exceeding expectations by $20 MM (Q1 2018: $2.9 BB). Its GAAP earnings stood at $315 MM or $0.59/share, declining significantly from $1.2 BB or $2.55/share during the same period last year. FE expects full-year EPS guidance to lie within the range of $2.37- $2.67 per share. We can see how the company's FY 2019 EPS guidance parallels its EPS reported during Q1 2018 and indicates that the company has significantly deteriorated its earnings profile. But despite the lower Y/Y EPS, FE's share price has climbed new highs during the past 6 months (Figure-2).
Figure-2 (Source: SA)
This situation looks surprising especially when we see that FE currently does not have an attractive valuation compared with peers. The company has one of the industry's highest price-to-earnings (Figure-3) and price-to-book multiples (Figure-4), with an EV/EBITDA multiple well above 10x (Figure-5).
Figure-3 (Source: YCharts)
Figure-4 (Source: YCharts)
Figure-5 (Source: YCharts)
From a technical viewpoint, the stocks 52-week range lies between $32.92 and $44.11. At the time of writing, FE last traded at $43.04 and that value was very close to the 52-week highs. Also, the current share price is way above the 200-day SMA (at ~$39.25) and indicates room for possible correction. The technical price chart (Figure-6) also reflects that short-term momentum may bring the stock back to the range of $41-42.
Figure-6 (Source: Finviz)
But despite the faltering earnings and a higher comparative valuation, FE has a strong dividend profile (Figure-7). The dividend yield has declined from ~4% to 3.44% but is still worthwhile in comparison with peers.
Although the current earnings provide for consistency in dividend payments, I believe that FE could further expand its dividends going forward, as it improves its earnings in the medium-to-long term. One such growth catalyst is the company's "energizing the future" project aimed at improving FE's distribution and transmission network, and enhancing the reliability of its services by curtailing line losses and power breakdowns.
This project also entails reducing the maintenance costs of FE's existing infrastructure which would eventually be passed on to the customers, thus lowering the price paid by them. This is likely to attract more customers and FE may witness an increase in revenues together with a reduction in operating costs. The project is already underway with a total estimated CAPEX between $4.2-5.8 BB, and FE expects to complete the upgradation of its network by 2021. The company has planned to spend $1.2 BB in FY 2019, and this is expected to bring ~600-700 improvement projects 'in service' during the current fiscal year. In my view, FE's "Energizing the Future" initiative will yield positively on its share price in the medium-to-long term.
Figure-8 (Source: First Energy)
In short, FE's current share price levels are exploring the higher end of its 52-week price range and the company's comparative valuation together with its earnings profile, and its technical picture, indicate that the share price growth is likely to slow down, and we may well see a correction in the near term. Nevertheless, FE's long-term growth denoted by its "Energizing the Future" initiative will improve customer service delivery and is likely to impact its revenues and earnings positively. This would also present an opportunity for the company to improve its dividend profile in future.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.