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Analyst Blog

On Jan 24, 2014, we downgraded our recommendation on utility provider FirstEnergy Corp. (FE - Analyst Report) to Underperform from Neutral. The company currently has a Zacks Rank #3 (Hold).

Why the Downgrade?

We have downgraded our recommendation on the stock primarily due to volatility in fuel prices, stringent government regulations and risks related to disruption of operations as a result of breakdown or failure of equipment.

Moreover, recent downward revision of dividend rate and narrowed operating earnings guidance for 2013 also led us to downgrade the stock.

Cause for Concern

The utility companies’ performance primarily depends on the prices of raw materials and timely availability of the same. Coal, natural gas and uranium are vital fuel inputs for power generation. An increase in commodity prices without an offsetting rise in power prices, or any disruption in fuel supplies will affect the company’s ability to generate power on time, thereby impacting margins.

Last week, the board of directors of FirstEnergy decreased its quarterly dividend rate and narrowed 2013 operating earnings guidance. The company also provided 2014 operating earnings guidance in the range of $2.45 - $2.85 per share, lower than the 2013 earnings projection in the band of $2.95 - $3.05 per share.

FirstEnergy’s generation, transmission and distribution businesses are subject to risks related to potential breakdown or failure of equipment or processes due to ageing infrastructure, accidents and labor disputes. The company may face operational difficulties if any of the above situations arises.

Other Stocks to Consider     

Some better-ranked stocks in the same sector include Wisconsin Energy Corp. (WEC - Analyst Report), The AES Corporation (AES - Analyst Report) and ALLETE, Inc. (ALE - Snapshot Report), each with a Zacks Rank #2 (Buy).

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