You Can Turn On The Gas With This Insider Buy

| About: NiSource Inc. (NI)

Glen Kettering, Senior Vice President of Corporate Affairs at NiSource Inc. (NYSE:NI), purchased 3,865 shares of this natural gas-focused utility on August 6 at an average price of $25.31 per share. This insider purchase thus consisted of nearly $100,000 in stock. Insider buying is important to follow because it tends to be associated with higher returns. NiSource, which also transports and stores natural gas in addition to operating an electric utility business, has a $7.2 billion market capitalization and is up about 8% so far this year after rising 35% in 2011. Kettering had earlier sold some of his shares of the company in February at an average price of $22.93 per share and last September at an average price of $21.35 per share; since he is buying at a higher price than he was selling six months ago, it is possible that he has changed his perception of the company and is now more bullish on the stock.

Kettering's purchase comes on the heels of NiSource Inc's quarterly report, in which the company announced declines in both revenue and cost of goods sold (likely due to falling natural gas prices in both cases). However, the 48% decline in COGS trumped the 15% decline in revenue and so NiSource Inc reported earnings per share of 23 cents compared to 14 cents in the second quarter of 2011. The company's gas transportation and electric utility business units saw increases in revenue. Over the first half of 2012, earnings have increased only slightly compared to the previous year as revenue declines bore a closer similarity to changes in expenses.

At the moment, NiSource seems fairly high priced for a utility stock, with a trailing P/E ratio of 24 and even a forward P/E ratio of 16 - note that sell-side analysts appear to be expecting continued higher earnings growth judging by the gap between these figures. The dividend yield is 3.8%, which is high compared to the broader market but not notable for a utility.

There was limited hedge fund interest in NiSource in the first quarter of the year. Millennium Management, run by Israel Englander, nearly doubled its position and held 2.3 million shares at the end of March (see other activity from Millennium Management). Louis Navellier's Navellier & Associates also had a position in the stock with 1.7 million shares; Navellier had initiated this position in the fourth quarter of 2011 (find other stock picks from Navellier & Associates).

Larger diversified utilities include Dominion Resources (NYSE:D), Duke Energy (NYSE:DUK), and FirstEnergy (NYSE:FE). All three of these peers pay higher dividend yields than NiSource - from Dominion's 3.9% to the other two companies' 4.5%. Trailing P/E multiples are between 17 and 23, and forward P/E multiples are between 14 and 17, so in that respect they are about as well priced as NiSource (though more of NiSource's valuation comes from future growth, as its trailing earnings are slightly lower compared to its valuation than in these other three cases).

The company is only weakly exposed to the broader market, as might be expected from a utility, with a beta of 0.5. Obviously, going by the quarterly results discussed above, NiSource Inc appears to be exposed to natural gas prices. If it can benefit from a fall in the price, then surely it would be harmed if natural gas prices were to rise? Of course, natural gas is in the midst of a production boom in the U.S. in areas such as the Marcellus Shale, and even a pick-up in the economy or increased export capabilities could be matched by higher supply. A word of caution though: despite the insider buy, we would like to see NiSource deliver a bit more growth before we recommend it relative to its larger-cap peers.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.