What's Wrong With Otter Tail?

Mini-conglomerate Otter Tail (Nasdaq: OTTR  ) can often lean on one or two obscure divisions when a couple of others aren't delivering the results it wants. But when the weakness shows up in several unrelated segments at once, there really isn't much left to do.

That's what happened in the third quarter, as Otter Tail reported strong sales but truly feeble earnings. Revenue jumped 9% year over year to $281 million, but earnings per share fell precipitously from $0.29 to $0.16. The core electric power division and the somewhat ironic "Other" segment pulled their weight with respectable results, but pretty much everything else is trending down.

Particularly problematic is the manufacturing operation, which saw lower productivity and smaller sales due to a lengthy design process on a wind tower project with a picky customer. In other lowlights, sales swooned slightly in the plastics division, but operating profits there were cut down to one-third of the year-ago period's. Health services pulled a neat trick by dropping sales but reversing a small operating loss to positive figures. The food ingredient outfit held pretty steady.

Now do you see why the "Other" division is so ironically named?

The main idea is to set Otter Tail apart from other regional power utilities such as CH Energy Group (NYSE: CHG  ) and El Paso Electric (NYSE: EE  ) by supplementing the core operations with a variety of more growth-oriented businesses. This is akin to how Warren Buffett built Berkshire Hathaway's (NYSE: BRK-B  ) kudzu of a conglomerate around a predictable base of insurance sales, except that Buffett worked on a much larger scale. This arrangement used to work out very well for Otter Tail, but now the company is in the annoying habit of underperforming even modest expectations. I guess not even the Incredible Transforming Firm is immune to the vagaries of a recession and a slow recovery.

Otter Tail is still a five-star CAPS stock out of five, so a lot of your fellow investors clearly love this quirky Motley Fool Hidden Gems veteran, perhaps thanks to its generous dividend yield. I'd love to see exactly why you like it so much -- the comments box is lurking below the article and dying to hear from you.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. Berkshire Hathaway is a Motley Fool Inside Value choice and a Motley Fool Stock Advisor selection. Otter Tail is a Motley Fool Hidden Gems pick. The Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.


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  • Report this Comment On November 04, 2010, at 3:56 PM, bjneeb wrote:

    I like OTTR because of the wind-tower mfg division. The firm provides the stable high div yield of an electric utility but plenty of potential upside growth from the wind tower business. I live 1 mile south of OTTR's wind tower mfg facility in West Fargo ND and use my personal angst from being disrupted by wind tower traffic as a gauge of how the tower business is doing :)

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