If you're looking for a small-cap to provide fuel to your equity portfolio yield, consider Laclede Group ( LG).

This St. Louis company delivers natural gas to more than 600,000 customers in eastern Missouri and a safe 5.7% yield to shareholders. And, there is nothing very complex about this retail natural gas outfit. Nearly 65% of revenue comes from captive, residential customers. An additional 23% of Laclede's revenue is from industrial gas customers.

Fueling Growth

While natural gas distribution is the major contributor to Laclede's bottom line, the company is becoming a regional player in natural gas and propane storage and transportation.

To provide more flexibility to diversify its revenue base, Laclede formed a holding company in October with the gas business as its largest subsidiary.

It didn't take long for the new Laclede Group to find a growth opportunity purchasing SM&P Utility Resources from NiSource ( NI - Get Report) in late January.

SM&P is one of the largest underground locating and marking companies in the U.S., identifying underground cables and pipes for utilities and contractors. SM&P performs more than 10 million location surveys a year in 10 central states. In 2002 its revenue should exceed $106 million -- up more than 20% from the prior year -- representing nearly 25% of all locating work in the U.S.


At a Glance
Laclede Group (LG:NYSE)
Current Price $23.55
52-week Range $25.48-$21.75
Price-to-Earnings Ratio* 18.8
Market Cap $443.6 million
Avg. Daily Volume 23,954
Inst. Ownership 25%
Dividend Yield 5.70%
Beta 0.0
Company Web site www.lacledegas.com
*Based on 2002 Estimates. Source: Market Guide, FirstCall, Company Reports

Douglas Yaeger, Laclede's chairman and CEO, says the deal should be accretive to 2002 earnings and is part of the company's new diversification strategy. "The acquisition of SM&P is a significant first step in achieving the Laclede Group's goal of creating a growth component with significant, sustainable, nonregulated earnings,'' he said upon completion of the merger. He notes that SM&P's earnings peak in the summer, exactly opposite of the gas business in which earnings peak in the winter.

Challenges to the Core

While the push to diversify will boost earnings and reduce seasonal volatility, revenue and income growth in the core gas business remain the most significant determinant of Laclede's success. And, 2002 is off to a difficult start.

In the company's first quarter (Laclede's fiscal year ends in September), the company saw earnings fall 58%, to 41 cents a share from 98 cents in the first quarter of 2001, a quarterly record for the company.

Those results, although disturbing, have a fairly benign explanation. The first quarter of 2002 was the third-warmest on record, nearly 21% warmer than normal, resulting in a 14 billion cubic feet decline in natural gas sales. Moreover, the quarter was 38% warmer than the first quarter of 2001, explaining the difficult comparison.

Continued warm weather in the second quarter is likely to pressure earnings further. Fortunately, Laclede is able to control costs as revenues decline. In the first quarter, the company's operating expenses declined nearly 43%, a result primarily of reduced natural gas costs.

However, in addition to weather-based challenges, Laclede lost a battle before the Missouri Public Service Commission (PSC) to extend an incentive-based rate program that benefited both ratepayers and shareholders. During the five-year period the "Gas Supply Incentive Program" was in place, Laclede generated $164 million in savings: $129 million was used to reduce natural gas rates and $35 million was retained by the company as earnings.


Fueling Dividends
Laclede's revenue shows solid growth
Year Revenue(in millions) Earnings per Share
1999 $491.3 $1.43
2000 566.1 1.37
2001 1,002.1 1.61
2002* 1,055.0 1.25
2003* 1,104.0 1.80
*Estimates. Source: First Call, Company Reports, TSC Research

The Missouri PSC refused to reconsider its termination of the program, instead approving a $15 million rate increase beginning in December. Laclede's request that a Missouri court review the PSC decision is pending.

A poor regulatory environment is a risk for Laclede shareholders, and they are not alone: Another Missouri utility, Ameren ( AEE) is currently facing a hostile Missouri PSC as it attempts to renew its incentive rate program.

Warm and Fuzzy

While 2002 earnings estimates remain fuzzy as warm weather wreaks havoc on natural gas demand, Laclede's strong balance sheet will help it weather through. Under normal weather conditions Laclede says it would earn $1.67 to $1.72 a share this year, up from $1.61 per share in 2001, when the weather conditions favored the company.

Current estimates suggest Laclede's earnings will drop to $1.25 a share this year, although those numbers do not appear to include potential benefits from the SM&P acquisition. While 2002 will fall below 2001 earnings, accretion from SM&P and better-than-expected cost savings or revenue may help Laclede beat reduced expectations.

And, assuming a return to "climatological normalcy" and some sanity from Missouri regulators, Laclede's management is solid and poised to grow the company's core business and diversify into complementary businesses. Earnings growth in the high-single digits -- solid for a utility -- is in reach over the next five years and, combined with the 5.7% dividend, should provide support for the stock price.

That said, at $23.50 the stock is near "fair value." Although a safe 5.7% yield is attractive and the prospects are bright, the stock becomes more attractive closer to $22. I like Laclede's prospects and give it 2.5 barrels. It is added to the Bottom of the Barrel income portfolio.

For an explanation of our barrel rating system, see our recent description.

A Nice Stent

In general, last week was good for the portfolio. And, it was an especially good week for SurModics ( SRDX - Get Report). The stock of this medical device coatings manufacturer gained about 17% in the past five trading sessions on news that clinical trials using drug-coated stents in angioplasty have been successful in reducing restenosis. Restenosis occurs when artery scarring from the balloon and stent leads to reblockage, requiring additional angioplasty or coronary bypass surgery.

SurModics' coatings technology is used in stents produced by Johnson & Johnson ( JNJ - Get Report), the leader in developing the new technology. The market for coated arterial stents is estimated at more than $4 billion in the coming years The stents could be approved for commercial use in Europe later this year and in the U.S. by early 2003.

SurModics stock remains attractive, although patient investors should find a better entry point once the euphoria from recent clinical successes subsides.


A 'Sur' Thing
SurModics moves higher on good stent trials
Current Rating Company/Ticker Date of Mention Current Price Mention Price* % Change From Mention % Change Weekly
Positive Outlook
2.5 Cost Plus World Markets (CPWM:Nasdaq) March 6, 2002 $28.20 $25.83 9.18% 3.56%
2.5 Rare Hospitality Intl. (RARE:Nasdaq) Feb. 20, 2002 26.24 25.72 2.02 8.38
2 Endocare (ENDO:Nasdaq) Jan. 23, 2002 17.84 18.21 -2.03 15.92
2.5 SurModics (SRDX:Nasdaq) Dec. 19, 2001 44.61 34.60 28.93 16.84
2.5 VitalWorks (VWKS:Nasdaq) Nov. 21, 2001 5.35 4.30 24.42 7.65
2 FPIC Insurance (FPIC:Nasdaq) Nov. 14, 2001 12.48 12.83 -2.73 1.30
3 Witness Systems (WITS:Nasdaq) Oct. 31, 2001 13.53 8.06 67.87 1.96
Market Outlook
3 NetBank (NTBK:Nasdaq) Feb. 6, 2002 17.02 13.45 26.54 7.45
2.5 Coastal Bancorp (CBSA:Nasdaq) Dec. 12, 2001 32.85 27.84 18.00 0.52
2.5 Coinstar (CSTR:Nasdaq) Nov. 7, 2001 31.05 19.96 55.56 -3.81
2.5 Hibbett Sporting Goods (HIBB:Nasdaq)** Oct. 24, 2001 23.95 20.04 19.51 -5.19
2.5 Quixote (QUIX:Nasdaq) Oct. 3, 2001 18.00 21.44 -16.04 0.00
Special Situation
1 Luby's (LUB:NYSE) Feb. 27, 2002 6.83 6.22 9.81 1.34
3 Quanta Systems (PWR:NYSE) Jan. 9, 2002 16.90 16.05 5.30 2.99
Avoid
Warning Actrade (ACRT:NYSE) Jan. 30, 2002 15.36 20.65 -25.62 -9.65
0.5 Goody's Family Clothing (GDYS:Nasdaq) Nov. 28, 2001 6.19 4.50 37.56 14.63
1 Bridgford Foods (BRID:Nasdaq) Oct. 10, 2001 10.79 13.18 -18.13 -1.46
Income Portfolio
2.5 Empire District Electric (EDE:NYSE) Jan. 16, 2002 21.39 21.23 0.75 1.81
2.5 Met-Pro (MPR:NYSE) Oct. 17, 2001 14.18 11.16 27.06 0.50
2.5 Integra Bancorp (IBNK:Nasdaq) Jan. 2, 2002 19.60 20.75 -5.54 -1.06
3 Alexandria Real Estate (ARE:NYSE) Feb. 13, 2002 43.52 40.25 8.12 3.18
*Average price on date of mention.
**Prices Adjusted for 3:2 split on Feb 20, 2002.
Source: TSC Research

In other portfolio news, Goody's Family Clothing ( GDYS) will report earnings on Wednesday. While recent stock gains are impressive, we continue to avoid the stock as better opportunities in the softlines retail business exist.


Do you have candidates for Bottom of the Barrel? If so, shoot me an email with the company's name, why you think it qualifies, and your full name and hometown. If I profile your suggestion, I'll send you a TSC gift to commemorate your pick.

Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. At time of publication, neither Edmonds nor his firm held positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send it to Chris Edmonds.