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FirstEnergy Corp (FE) Annual Valuation – 2014

500px-FirstEnergy_Logo.svgBenjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing 5 Low PEmg Companies for the Defensive Investor.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how FirstEnergy (FE) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): FirstEnergy Corp. is a holding company. The Company is a diversified energy company operating in three segments: regulated distribution, regulated transmission and competitive energy services segment. Regulated Distribution segment distributes electricity through its 10 utility operating companies, serving within 65,000 square miles of Ohio, Pennsylvania, West Virginia, Maryland, New Jersey and New York. Regulated Transmission segment transmits electricity through transmission facilities owned and operated by American Transmission Systems, Incorporated (ATSI) and Trans-Allegheny Interstate Line Company (TrAIL). Competitive Energy Services segment, through FirstEnergy Solutions Corp. ( FES) and Allegheny Energy Supply Company, LLC (AE Supply), supplies electricity to end-use customers through retail and wholesale arrangements, and the provision of partial provider of last resort (POLR) and default service for some utilities in Ohio, Pennsylvania and Maryland, including the Utilities.

FE Chart

FE data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 – PASS
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 2/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – FAIL

Valuation Summary

Key Data:

Recent Price $34.18
MG Value $0.00
MG Opinion Overvalued
Value Based on 3% Growth $26.02
Value Based on 0% Growth $15.25
Market Implied Growth Rate 5.27%
Net Current Asset Value (NCAV) -$80.85
PEmg 19.05
Current Ratio 0.51
PB Ratio 1.13

Balance Sheet – 12/31/2013

Current Assets $3,887,000,000
Current Liabilities $7,637,000,000
Total Debt $15,831,000,000
Total Assets $50,424,000,000
Intangible Assets $6,418,000,000
Total Liabilities $37,732,000,000
Outstanding Shares 418,630,000

Earnings Per Share

2013 $0.90
2012 $1.84
2011 $2.21
2010 $2.57
2009 $3.29
2008 $4.38
2007 $4.22
2006 $3.82
2005 $2.65
2004 $2.66

Earnings Per Share – ModernGraham

2013 $1.79
2012 $2.45
2011 $2.95
2010 $3.43
2009 $3.79
2008 $3.88

Dividend History

FE Dividend Chart

FE Dividend data by YCharts

Conclusion:

FirstEnergy is not suitable for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor’s concerns are the low current ratio and the lack of sufficient earnings growth over the last ten years.  The Enterprising Investor has an issue with the high level of debt relative to the current assets and the lack of earnings growth over the last five years.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities through a review of ModernGraham Stocks & Screens and 5 Undervalued Companies for the Enterprising Investor.  From a valuation side of things, the company appears to be overvalued after seeing its EPSmg (normalized earnings) drop from $3.79 in 2009 to $1.79 for 2013.  This demonstrated drop in earnings does not support the market’s implied estimate of 5.27% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls below the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on FirstEnergy Corp (FE)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in FirstEnergy (FE) or any other company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.

Logo taken from wikipedia; this article is not affiliated with the company in any manner.

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