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Here's How FirstEnergy May Be Failing You

By Seth Jayson - Updated Apr 6, 2017 at 10:00PM

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Keep your eye on margins.

Margins matter. The more FirstEnergy (NYSE: FE) keeps of each buck it earns in revenue, the more money it has to invest in growth, fund new strategic plans, or (gasp!) distribute to shareholders. Healthy margins often separate pretenders from the best stocks in the market. That's why I check on my holdings' margins at least once a quarter. I'm looking for the absolute numbers, comparisons with sector peers and competitors, and any trend that may tell me how strong FirstEnergy's competitive position could be.

Here's the current margin snapshot for FirstEnergy and some of its sector and industry peers and direct competitors.

Company

TTM Gross Margin

TTM Operating Margin

TTM Net Margin

FirstEnergy 51.9% 15.8% 5.1%
Exelon (NYSE: EXC) 37.7% 24.0% 12.9%
PPL (NYSE: PPL) 31.4% 22.1% 11.0%
National Grid (NYSE: NGG) 68.7% 26.3% 10.1%

Source: Capital IQ, a division of Standard & Poor's. TTM = trailing 12 months.

Unfortunately, that table doesn't tell us much about where FirstEnergy has been, or where it's going. A company with rising gross and operating margins often fuels its growth by increasing demand for its products. If it sells more units while keeping costs in check, its profitability increases. Conversely, a company with gross margins that inch downward over time is often losing out to competition and possibly engaging in a race to the bottom on prices. If it can't make up for this problem by cutting costs -- and most companies can't -- then both the business and its shares face a decidedly bleak outlook.

Of course, over the short term, the kind of economic shocks we recently experienced can drastically affect a company's profitability. That's why I like to look at five fiscal years' worth of margins, along with the results for the trailing 12 months (TTM), the last fiscal year, and the last fiscal quarter (LFQ). You can't always reach a hard conclusion about your company's health, but you can better understand what to expect and what to watch.

Here's the margin picture for FirstEnergy over the past few years.

Source: Capital IQ, a division of Standard & Poor's. Dollar amounts in millions. FY = fiscal year. TTM = trailing 12 months.

(Because of seasonality in some businesses, the numbers for the last period on the right -- the TTM figures -- aren't always comparable to the FY results preceding them.)

Here's how the stats break down:

  • Over the past five years, gross margin peaked at 57.5% and averaged 52.6%. Operating margin peaked at 23.5% and averaged 19.8%. Net margin peaked at 11.3% and averaged 9.2%.
  • TTM gross margin is 51.9%, 70 basis points worse than the five-year average. TTM operating margin is 15.8%, 400 basis points worse than the five-year average. TTM net margin is 5.1%, 410 basis points worse than the five-year average.

With recent TTM operating margins below historical averages, FirstEnergy has some work to do.

If you take the time to read past the headlines and crack a filing now and then, you're probably ahead of 95% of the market's individual investors. To stay ahead, learn more about how I use analysis like this to help me uncover the best returns in the stock market. Have an opinion on the margins at FirstEnergy? Let us know in the comments section below.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

FirstEnergy Corp. Stock Quote
FirstEnergy Corp.
FE
$38.62 (2.36%) $0.89
Exelon Corporation Stock Quote
Exelon Corporation
EXC
$52.92 (1.21%) $0.63
National Grid plc Stock Quote
National Grid plc
NGG
$65.66 (-0.52%) $0.34
PPL Corporation Stock Quote
PPL Corporation
PPL
$28.23 (1.22%) $0.34

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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