XLU - FirstEnergy: Bearish Technical Trends With An Unattractive Valuation

Summary

• Utilities are not a great spot to be in a Goldilocks scenario.
• The group benefitted during 2022's volatility, but shares of one name are not a screaming buy on valuation.
• FirstEnergy's chart, meanwhile, shows a bearish pattern about to potentially unfold.

Utilities stocks are generally not a very strong performing space when inflation is high and falling. With much softer CPI and PPI data for December released earlier this month, it’s clear we are in a hopeful “disinflationary” environment. Medical equipment and semiconductor stocks tend to perform best while Utilities simply perform in line with the market.

One name has bounced big as rates have dropped back, but I now see shares of FE as expensive with a bearish chart. Let me detail why.

Where To Go In A Disinflationary World

According to Bank of America Global Research, FirstEnergy Corporation (FE) is a pure-play regulated electric utility conglomerate of transmission & distribution (T&D) assets. The company has 6+Mn customers across six states (OH, PA, NJ, WV, and MD primarily) and 10 distribution company footprints. FE also owns 3 transmission utilities regulated by FERC with oversight from state utilities regulators.

The Ohio-based $24.4 billion market cap Electric Utilities industry company within the Utilities sector trades at a near-market 19.5 trailing 12-month GAAP price-to-earnings ratio and pays a high 3.6% dividend yield, according to The Wall Street Journal .

Back in October, FE reported in-line EPS figures but did beat on the top line. On the bullish side, the utility was selected to connect offshore wind power to New Jersey in November and another project to construct a key transmission line in northeast Ohio should be supportive for FE. Still, the valuation does not look compelling. Read on.

On valuation , analysts at BofA see earnings having fallen more than seven percentage points in 2022 but then bouncing back by 4% this year with 7% EPS growth by 2024. The Bloomberg consensus forecast is about on par with what BofA sees. With a sour growth outlook, the current 17.7 trailing 12-month operating P/E, per Seeking Alpha, suggests the stock is not a bargain.

While not overly expensive, with green shoots in the economy sprouting, there are better cyclical values to be had. FE has a near-market EV/EBITDA multiple and dividends are expected to grow somewhat modestly in the coming quarters.

FirstEnergy: Earnings, Valuation, Dividend Forecasts

Looking ahead, corporate event data from Wall Street Horizon show a confirmed Q4 2022 earnings date of Monday, February 13 AMC with a conference call later that morning. You can listen live here . Shares have an ex-dividend date of Monday, February 6 before the Q4 reporting date.

Corporate Event Calendar

The Technical Take

I was bullish on FE’s chart back in October based on a double-bottom pattern. That turned out to be a solid call based on the charts. Now, though, shares are right back at key resistance levels I pointed out in the prior article. There is a new development, though. I see a bearish rising wedge pattern based on higher highs and higher lows consolidating into a coil around $43.

The presumption is that the stock will sell off from current levels – perhaps falling back to the flat 200-day moving average or lower. Overall, I’m now bearish on the chart after a 20% rally from the October lows. What’s bullish, though, is that FE’s RSI continues to run strong – we have not seen bearish divergence yet.

FE: Bearish Ascending Wedge

The Bottom Line

FE looks expensive on valuation and its chart has turned bearish. Thus, I am downgrading the stock from hold to sell. The stock could be a buy on a move into the mid to high $30s. Moreover, a bullish breakout above $45 would favor the swing trader bulls.

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