How High Can FirstEnergy Fly?

Shares of FirstEnergy (NYSE: FE  ) hit a 52-week high yesterday. Let's look at how it got here and whether clear skies are ahead.

How it got here
The electricity generation business hasn't been kind to everyone this year, but FirstEnergy is reaching new highs along with record-high temperatures around the country. The company's revenue jumped an impressive 14% in the first quarter and earnings per share rose from $0.15 a year ago to $0.73 in the first quarter.

This earnings improvement has helped drive shares higher, but the record temperatures around the country have helped as well. Competitive energy services were the fastest-growing segment in the first quarter, and with electricity demand peaking and power outages around the country, this business should do well again this quarter.

Compared to power-producing companies around the country, FirstEnergy's stock has done very well. Southern (NYSE: SO  ) has followed a similar path while NRG Energy (NYSE: NRG  ) and Exelon (NYSE: EXC  ) have lagged behind in the last two years. Health in the generation business has been sporadic and so have stock gains in recent years.

FE Chart

FE data by YCharts

You can see below why NRG has lagged the competition; return on assets and the company's forward P/E just don't stack up.

Company

Price/Book

Return on Assets

Forward P/E

Dividend Yield

FirstEnergy 1.6 3.4% 15.4 4.5%
Southern 2.3 4.5% 16.5 4.2%
NRG Energy 0.5 0.8% 65.0 n/a
Exelon 1.5 4% 13.4 4%

Source: Yahoo! Finance.

As you can see by the ratios above, First Energy is in the same range as Southern and Exelon with respect to the other ratios provided.

What's next?
So can shares continue to rise at a steady pace? I think investors would be wise to look at this as a dividend play with some potential upside if electricity usage increases, but I wouldn't expect a huge rise in the stock.

The CAPS community is expecting big things, giving the stock a four-star rating (out of five); 365 players have made an outperform call versus just 21 underperform calls.

Based on a strong dividend and a reasonable P/E ratio, I think shares can continue to rise, but I wouldn't expect much more than a market return given the current economy. Electrical usage has stopped rising the way it did for decades as customers install more efficient electronics so the competitive energy business will get... more competitive. For risk-averse investors, FirstEnergy is a good pick, but growth investors will want to look elsewhere.

Interested in reading more about FirstEnergy? Click here to add it to My Watchlist, which will find all of our Foolish analysis on this stock.

Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

Motley Fool newsletter services have recommended buying shares of Southern and Exelon. Motley Fool newsletter services have recommended creating a write covered straddle position in Exelon. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 03, 2012, at 12:16 PM, Paulson545 wrote:

    When you have these kind of articles " how high can a stock fly", usually means a top is in. IMO

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