Fueling GrowthWhile 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)
|Market Cap||$443.6 million|
|Avg. Daily Volume||23,954|
|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 CoreWhile 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|
|*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
Warm and FuzzyWhile 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.
A Nice StentIn 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|
|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|
|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|
|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|
|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|
|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.
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