A $28 Billion Investment Will Secure Reliable Utility Operations

Key Takeaways

• Strategic investments in infrastructure and system enhancements are expected to improve reliability, efficiency, and revenue growth.
  
• Regulatory frameworks and increased electricity demand could result in stable earnings and enhanced revenue opportunities.
  
• Potential regulatory and economic challenges in Ohio could delay earnings growth and impact revenue due to reliance on uncertain legislative and market conditions.

Catalysts

Engages in the generation, distribution, and transmission of electricity in the United States.

• FirstEnergy's plan to invest $28 billion through 2029 focuses on enhancing system reliability and resiliency. This substantial capital expenditure is expected to positively impact revenue through improved infrastructure and services.
  
• The implementation of organizational design changes, including flattening management layers and reducing headcount, aims to increase operational efficiency, which can contribute to improved net margins.
  
• The approval of a settlement for the Energize New Jersey program, including formula rate treatment for substantial capital investments, provides predictable earnings growth from regulated returns, potentially increasing the company's earnings.
  
• Legislative activity in Ohio, including potential new regulatory frameworks with multiyear rate plans and forward test years, could create a more stable environment for future revenue growth.
  
• Continued data center demand and regional economic development efforts, such as Meta's investment in a new data center, are likely to drive higher revenue through increased electricity demand and system capacity investments.

FirstEnergy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming FirstEnergy's revenue will grow by 4.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.9% today to 11.0% in 3 years time.
• Analysts expect earnings to reach $1.7 billion (and earnings per share of $2.96) by about May 2028, up from $1.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.1x on those 2028 earnings, down from 23.0x today. This future PE is lower than the current PE for the US Electric Utilities industry at 21.1x.
• Analysts expect the number of shares outstanding to grow by 0.28% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

FirstEnergy Future Earnings Per Share Growth

Risks

• The potential difficulties in reaching a settlement with Ohio regulators, particularly regarding base rate cases, could lead to delays and uncertain financial outcomes, impacting revenues and regulatory compliance.
  
• The threat of an economic slowdown and reduced industrial demand, especially from the steel sector tied to automotive manufacturing, may negatively affect anticipated load growth and revenue streams.
  
• Legislative developments in Ohio and the impact of potential changes in regulatory frameworks pose a risk, as delays in transitioning to a new framework could hinder earnings growth and capital investment returns.
  
• The substantial reliance on legislative changes to improve investment outcomes might lead to uncertainties in future earnings and projections, especially if desired regulatory reforms are not implemented or take longer than expected.
  
• Exposure to volatility in market conditions, such as capacity auction pricing and macroeconomic pressures, may lead to unforeseen expenses or diminished customer demand, potentially affecting revenue and net margins.

Valuation

• The analysts have a consensus price target of $44.693 for FirstEnergy based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $15.7 billion, earnings will come to $1.7 billion, and it would be trading on a PE ratio of 18.1x, assuming you use a discount rate of 6.2%.
• Given the current share price of $43.17, the analyst price target of $44.69 is 3.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.