Top Picks Mid-Year Updates: FirstEnergy Corp.

Six months ago, I recommended multi-state electric utility FirstEnergy Corp. (FE) as a buy at $32 per share or lower; I also selected the stock as my Top Pick for 2021 and the shares are up 32% so far this year.

My principal rationale was investor worries about fallout from the Ohio bribery scandal had run well ahead of reality. Despite the explosive headlines, I believed the stakes were too high for the state and the utility not to eventually reach an accommodation. And once bribery scandal risk faded, I expected the stock to close its then-wide valuation gap with the rest of the utility sector.

As it’s turned out, the company has managed to lower the temperature in the bribery case, including entering talks with the U.S. Attorney’s office for a potential settlement. It’s also posted Q1 2021 earnings at the high end of expectations and remained on track to reach target 5 to 7 percent annual growth for the year.

Those developments have helped lift FirstEnergy stock from a valuation of less than 11 times expected next 12 months earnings to more than 15 times. Shares have also arguably been helped by the interest of activist investor Carl Icahn, who now holds a 3.5 percent ownership interest and has two seats on the company board. 

I expect FirstEnergy earnings to continue improving this year and as the scandal is resolved to ultimately fuel a return to dividend growth.

Other potential upside catalysts for the stock the rest of the year include a possible sale of minority ownership stakes in certain regulated utility units. There’s also the possibility of merging with another electricity distribution focused utility such as Exelon Corp. (EXC). I’d be a buyer on a dip to $35 or lower.

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