Otter Tail Decides to Simplify Itself

I used to love Otter Tail (Nasdaq: OTTR  ) for the mini-conglomerate that it was. Whenever the core business of electric utility services ran into headwinds, there was always the plastics division to pick up the slack. Maybe the heavy construction subsidiaries and the wind towers they made. Or perhaps the freeze-dried potatoes business. You never knew where the saving grace would come from, only that something would save the day. That was a fun company to watch.

But that charm is going away, and fast. In the just-reported fourth quarter, Otter Tail missed revenue and earnings targets badly. Revenues are shrinking, margins compressing, and the year-ago quarter's earnings of $0.05 per share collapsed into a $1.23 loss per share. And much of the damage comes from Otter Tail's attempt to simplify the business.

I think it's a misguided effort. This quarter's results were distorted by writedowns and piece-by-piece spinoffs all over the place. The DMS Health Technologies has been sold to a private equity group, resulting in a $39 million charge against earnings. The company got rid of the Idaho Pacific Holdings potato processing operation last May and the trucking segment in December. The Aviva Sports recreational equipment business, acquired in 2007, disappeared in January.

Management vows to pursue "a more focused and agile Otter Tail," reducing risk and boosting the company's credit quality. The way I see it, Otter Tail is losing the stabilizing fins it used to wear. The company is becoming just another electric utility. Sure, Otter Tail pays a generous dividend at a 5.4% yield, blowing past sector rivals Duke Energy (NYSE: DUK  ) and Progress Energy (NYSE: PGN  ) . Neither one can break the 5% mark today.

But the one thing that makes Otter Tail unique is that diverse business model, and management wants none of it going forward. If all I wanted was a solid dividend, I'd look to a company like Duke first -- nearly all of the payout with less of a turnaround risk. And even then, there are far better dividend plays on the market today.

Fool contributor Anders Bylund holds no position in any of the companies mentioned. Motley Fool newsletter services have recommended buying shares of Otter Tail. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Check out Anders' holdings and bio, or follow him on Twitter and Google+. We have a disclosure policy.


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  • Report this Comment On February 08, 2012, at 10:52 PM, InvestWhatWorks wrote:

    Good article.

    Normally I do like it when companies sell or spin-offs parts of their business. Selling off parts to focus on the core: often works out well. Currently working out well for another company I own (Beam, formally Fortune Brands). But there was something about Otter Tail's mini-conglomerate approach that really intrigued me.

    This simplification plan might turn out well for them in the future. But like you mentioned, if I want a high-yielding electric utility (and nothing else), there are other companies I'd currently prefer to own over Otter Tail.

  • Report this Comment On February 08, 2012, at 10:56 PM, vidar712 wrote:

    How can a utility be agile?

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