It's got a little bit of everything. An electric power utility. PVC pipe manufacturing facilities. Medical imaging subsidiaries. Contractors, electrical design and construction services, natural gas marketers, and tractor trailers. Heck, it's even got a dehydrated-potato-manufacturing plant for snack foods and bakeries. Otter Tail (NASDAQ:OTTR) is a true conglomerate in the style of Warren Buffett's Berkshire Hathaway (NYSE:BRKa) (NYSE:BRKb).
What started as a power utility in 1907 has since embraced a diversified array of businesses with the common goal of improving the bottom line. For this year's third quarter, those businesses seem to have met that goal: Revenues climbed 27% to $272.7 million, and profits rose 60% to $17.6 million, or $0.59 per share. The many moving parts mostly worked well, but results were driven particularly by the performance of Otter Tail's electric utility and plastics segments. Revenues there grew 37% and 65%, respectively, and profits more than doubled in each.
Not all of Otter Tail's lines turned profits. Its multitude of smaller businesses, lumped under the catchall category "other," include its trucking company, potato factory, and natural gas marketing arm. Together, they had a net loss of $1.8 million, though that included a $1 million goodwill impairment charge.
Otter Tail looks at a number of factors in determining whether a potential acquisition will prove profitable. For one, it wants the products sold to be commercially oriented, rather than relying upon the fickle demands of consumers. A business is going to need certain goods and services regardless of fashion and taste, and Otter Tail wants to provide them. Its PVC pipe division, for example, provides plastic pipe to municipal water, wastewater, and water treatment facilities, operations that will continue to demand supply (and pay for it) regardless of conditions. The 140% jump in profits in the segment is largely attributable to the rise in the cost of resin used to produce the pipe, which Otter Tail was able to pass along to its customers.
Otter Tail also wants to acquire 100% of middle-market companies, but keep their existing management team onboard. That's a very Buffett-esque quality; the Oracle of Omaha also did not want to interrupt the same operations of the business that made it attractive to him in the first place.
Not all of Otter Tail's acquisitions have worked out as planned. It acquired a telecommunications company, a steel fabricator, and a chassis-straightening company, all of which it sold relatively soon after. Yet this diversified amalgam's successful overall track record led analyst Bill Mann to recommend the company in Motley Fool Hidden Gems. The stock is up 7% since its selection, compared to a quarter-point gain by the S&P 500 over the same period.
The risk of investing in Otter Tail is that acquisitions sometimes go awry, and many of the fields it operates in are heavily regulated. Profit margins, for example, are strictly controlled in its utility division, and it may be subject to capricious actions by state and local regulators. Yet on the whole, this company seems to be greater than the sum of its parts.
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Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. The Motley Fool has a disclosure policy.
