Earnings Preview: FirstEnergy Corp.

FirstEnergy Corporation (FE - Analyst Report), a diversified energy company involved in the generation, transmission and distribution of electricity as well as other energy-related services, is slated to release its third-quarter 2012 earnings results before the market bell on November 8, 2012.

Recap, Second Quarter-2012

FirstEnergy reported earnings of 59 cents per share in the second quarter of 2012, missing the Zacks Consensus Estimate by 5 cents and also the year-ago earnings of 70 cents per share. Decline in sales margins from operations, lower investment income and higher depreciation expense impacted earnings.

Revenue in the said quarter increased to $3.87 billion from $4.06 billion in the year-ago quarter. However, revenue fell short of the Zacks Consensus Estimate by $4.03 billion.

The weak top-line result was largely attributed to lower revenues from the company’s regulated business.

Guidance 2012

FirstEnergy reaffirmed its operating earnings expectation in a band of $3.30-$3.60 per share for 2012. GAAP earnings for 2012 are expected in the range of $2.80-$3.10 per share.

Zacks Consensus

The Zacks Consensus Estimate for the third quarter 2012 is $1.06 per share compared with $1.34 per share reported in the comparable quarter, last year. At present, the Zacks Consensus Estimate for earnings ranges from $1.02 per share to $1.26 per share.

For full-year 2012, the Zacks Consensus Estimate is $3.37 per share, down from $3.62 per share recorded in the prior year. The current Zacks Consensus Estimate ranges between $3.30 per share and $3.46 per share.

Estimate Revisions Trend

Agreement

We witness quite a few estimate revisions at this point. Among 12 available estimates, 5 estimates moved south while 2 estimates moved up in the past 30 days for the third quarter. For the said quarter, no estimates revision was witnessed in the last 7 days.

For 2012, out of the total 16 estimates 3 moved downwards in the past month with no positive revision. The last 7 days observed no revisions to the estimates.

Magnitude

The Zacks Consensus Estimate for the third quarter declined substantially by 9 cents to $1.06 from $1.15 in the last 30 days whereas it remained constant for the past week. For full-year 2012, the consensus estimate saw no movement in the past week as well as in the last month.

Surprise History

With respect to earnings surprise, the company’s performance was mixed in the last four quarters. The results of the company surpassed our expectation in two of the last four quarters, while it missed the mark in the first and second quarters of 2012.

The earnings surprise in the last four quarters ranged from (6.3%) to 8.9%. The average surprise over the last four quarters remained a positive 0.70%.

Our Recommendation

We believe the FirstEnergy-Allegheny merger would continue to spur growth for the company. FirstEnergy’s retail business looks promising and will certainly add to the company’s near-term profitability. Moreover, strong hedging measures would contribute to a steady flow of earnings.

However, regulatory risks could result in margin pressure while rise in the prices of key fuel inputs without an offsetting rise in power prices and weather irregularities could act as headwinds.

The recent Hurricane Sandy created severe damages to FirstEnergy’s power infrastructures in its service areas of Pennsylvania, West Virginia and Maryland which led to disruption of services. However, most of the power has been restored in the company’s core service territories with only a negligible portion still remaining.

FirstEnergy operates in a competitive energy market and faces stiff opposition from companies like American Electric Power Company Inc. (AEP - Analyst Report) and Dominion Resources Inc. (D - Snapshot Report). Both American Electric and Dominion Resources posted dull earnings results in the third quarter 2012.

Currently, we are maintaining a long-term Neutral recommendation on FirstEnergy Corp. The company has a Zacks #3 Rank (Hold rating).