Analysts at Credit Suisse have downgraded FirstEnergy Corp. (
) to a Neutral rating from Outperform, while lowering their price
target on the stock to $40 from $45 a share.
"We have liked FE shares over peers for some time, attracted to
the large base of regulated utility earnings (73% of 2015) that to
us better protected the rich 5.2% dividend yield as well as
management's commitment to, and success in, finding ways to extract
value from the generation business (
) in spite of sustained weak power market conditions through the
early adoption of Retail, aggressive O&M controls, and fleet
management through plant closures and seasonal dispatch until unit
economics improved," said Credit Suisse.
"We still see FE striving to do these things but the ugly
reality of the 2016/17 RPM auction results are hard to deny: poor
discipline by incumbent generators in the face of depressed
forwards and the crushing impact of newbuild capacity plus greater
imports are all contributing to an oversupplied market that will
inevitably leave energy and capacity prices weak."
The firm added "We are lowering FE to Neutral (from Outperform)
- meaning performance in-line with peers - and a target of $40
(from $45) built from our sum-of-the-parts valuation methodology.
We see downside from here in all of the Integrated power names as
the long and uncertain path to a power market recovery forces
investors to reconsider the multiples paid for commodity cyclical
power generation assets.
"We are loathe to downgrade FE after the run of underperformance
in 2013 and could see some catalysts that could help the story
relative to our revised view:
A steeper rally in natural gas prices could boost power prices
and create more enthusiasm that generator profitability will
improve faster, allowing investors to take advantage of FE's
leverage to higher power prices.
"We are revising our 2013/2014/2015 EPS estimates to $3.01/$3.09
(from $3.02/$3.06) respectively."
Shares if FE are down 7.4% to $39.48 in afternoon trade, and
moves in the low end of a 52-week range of $38.26 - $51.14.
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