Data Center Demand And $28B Grid Investments Will Expand Infrastructure

Key Takeaways

• Accelerating demand from data centers, electrification, and favorable regulation is driving major infrastructure investment, boosting long-term revenue and earnings prospects.
  
• Strong financial discipline and de-risking enable growth funding from internal cash flow, reducing the need for new equity and supporting margin expansion.
  
• Legal and regulatory risks, capital-intensive grid modernization, decarbonization pressures, and rising financing costs threaten long-term profitability, margins, and financial flexibility.

Catalysts

Engages in the generation, distribution, and transmission of electricity in the United States.

• Surging demand from data centers, AI, and high-growth sectors is driving significant load growth in FirstEnergy's core service areas, leading to accelerated investment in transmission and distribution infrastructure and supporting stronger long-term revenue and rate base expansion.
  
• Large-scale infrastructure modernization and grid hardening initiatives-including the $28 billion investment plan through 2029 and a 15% CAGR in transmission rate base-enable higher returns on equity, improved reliability, and ultimately enhance net margins and earnings growth.
  
• Constructive regulatory environments in key states (e.g., Pennsylvania and Ohio) with mechanisms like forward-looking base rates and distribution investment surcharges increase earnings predictability and support consistent growth in cash flow.
  
• State and national decarbonization policies, along with pervasive electrification trends (e.g., electric vehicles, electrified heating), are creating incremental demand and incentivizing further grid and capacity investments, providing a structural tailwind for long-term revenue and asset base growth.
  
• Effective financial discipline-including O&M expense reduction and strong cash generation-combined with successful balance sheet de-risking (e.g., asset sales, refinancing) positions FirstEnergy to fund its capex program without near-term equity needs, supporting higher net margins and more robust earnings per share growth.

FirstEnergy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming FirstEnergy's revenue will grow by 4.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.4% today to 11.0% in 3 years time.
• Analysts expect earnings to reach $1.7 billion (and earnings per share of $3.0) by about September 2028, up from $1.3 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.9x on those 2028 earnings, down from 19.1x today. This future PE is lower than the current PE for the US Electric Utilities industry at 19.9x.
• Analysts expect the number of shares outstanding to grow by 0.19% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.78%, as per the Simply Wall St company report.

FirstEnergy Future Earnings Per Share Growth

Risks

• Accelerating adoption of distributed energy resources (DERs), such as residential solar and battery storage, could reduce reliance on centralized grid utilities, shrinking FirstEnergy's long-term addressable customer base and putting downward pressure on future revenues.
  
• Ongoing legal and regulatory overhang related to prior high-profile scandals (e.g., Ohio House Bill 6) persists as a source of reputational risk and could lead to elevated compliance costs, potential fines, and higher insurance premiums, which may compress net margins and earnings predictability in the long term.
  
• Sustained high levels of capital investment required for infrastructure modernization, grid resilience, and expanding transmission (including meeting data center and load growth) may strain free cash flow, increase debt load, and eventually necessitate new equity issuance, diluting earnings per share and putting pressure on long-term net margins.
  
• Policy and regulatory pressures for decarbonization-especially if accelerated-could require FirstEnergy to retire coal-fired plants sooner or make costly upgrades, resulting in stranded asset risks or unplanned capital expenditures that would adversely affect profitability and long-term earnings growth.
  
• Rising interest rates and potential tightening of capital markets increase the cost of debt-funded capital expenditure, challenging FirstEnergy's financial flexibility and ultimately impacting returns on equity and sector-wide profitability.

Valuation

• The analysts have a consensus price target of $46.25 for FirstEnergy based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $15.6 billion, earnings will come to $1.7 billion, and it would be trading on a PE ratio of 18.9x, assuming you use a discount rate of 6.8%.
• Given the current share price of $43.36, the analyst price target of $46.25 is 6.2% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.