Otter Tail Corporation: An Option for Income Investors Seeking Price Appreciation Potential

| About: Otter Tail (OTTR)

What began as a small power company based in Minnesota, Otter Tail Corporation (NASDAQ:OTTR) is now a diversified mini-conglomerate with holdings in power generation, wind energy, plastics, manufacturing, construction, food and health.

After peaking in the middle of 2008, the stock started a slide that at one point was down over 60% in that same year. While the stock has recovered from its lows, it is still well off the highs of nearly two years ago.

Below I summarize the operations with a brief discussion regarding 2010 performance and management's outlook for 2011.

Electric Power Generation

This segment consists of the following two subsidiaries:

  • Otter Tail Power Company (OTP) provides electricity to approximately 129,000 customers in western Minnesota, eastern North Dakota and northeastern South Dakota. The company generates its power primarily through the use of coal, wind and hydro. The company's transmission infrastructure extends 5000 miles and its operating territory encompasses 50,000 square miles.
  • Otter Tail Energy Services Company provides technical and engineering services in North Dakota and Minnesota. In addition, the company also provides energy efficient lighting to customers within its service area.

2010 saw revenues increase 8.1% to $340.7 million while earnings increased a modest 2.4% to $34.5 million. The company expects continued increases in revenue and earnings in 2011. OTP is also pursuing additional investment opportunities in generation and transmission projects that could have additional positive impacts on earnings and return on capital.

Wind Energy

This segment consists of the following two subsidiaries:

  • DMI Industries, Inc. is a heavy steel manufacturer of primarily wind towers. The company's services also include the design and delivery of wind towers to customers across most of the United States and Canada. DMI has fabrication plants located in North Dakota, Oklahoma and Ontario, Canada.
  • E.W. Wylie Corporation is a trucking company that specializes in flatbed, heavy haul and wind energy components. The company's fleet serves most of the United States and Canada.

Overall, the wind energy segment saw a moderate increase in revenue to $197.7 million, while earnings turned negative to show a loss of $21.2 million. The loss was primarily due to a drop in earnings of $25.5 million at DMI which also saw revenues slide $17.1 million. The negative results were primarily due to additional design costs, a valuation allowance against deferred tax assets and an increase in interest expense. E.W. Wylie showed positive results with revenues increasing $21.9 million and net income rising $3.5 million. The positive results were driven by a major wind turbine project, a 15.8% increase in miles driven combined with a 12.3% increase in revenue per mile. Brokerage revenues and net margins also increased $3.4 million and $1.3 million respectively. Improved operations are expected from the wind energy segment in 2011 due in part to the absence of lost productivity related to a customers new tower design that had a required delivery schedule.


This segment consists of the following three subsidiaries:

  • BTD Manufacturing, Inc. performs various services including contract machining, metal parts stamping, fabrication, tubing, welding and tooling.
  • ShoreMaster, Inc. produces waterfront equipment including docks, lifts, gangways, wave attenuators, canopies, accessories and recreational products.
  • T.O. Plastics, Inc designs and manufactures thermoformed products and packaging for the medical, industrial, consumer, food, electronics and horticulture industries.

The manufacturing segment revenues increased nearly 9% to $178.7 million, but the net loss increased 169% to $14.8 million. While BTD and T.O. saw increases in both earnings and revenue, this segment was held back by ShoreMaster which saw its revenue decrease of $9.3 million and its net loss increase by $14.9 million. The increased loss at ShoreMaster was primarily the result of an asset impairment charge of $15.6 million. The company expects improved results from its manufacturing segment in 2011 led by improved earnings at BTD and a 36.5% increase in backlog when compared to the beginning of 2010.


This segment consists of the following two subsidiaries:

  • Foley Company is a mechanical and general contractor providing services in the areas of process piping, HVAC, instrumentation, power generation, shop fabrication as well as water and wastewater treatment. The company has offices in Nashville, Kansas City and Sedalia, Missouri.
  • Aevenia, Inc. is an energy and electrical construction company providing services in the areas of renewable energy, transmission/distribution, substations, fiber optics, underground construction, data communications, electrical contracting and urban telecommunication and power. The company's service area is primarily in the Midwestern states of the U.S.

The construction segment saw revenues increase 29% to $134.2 million primarily due to a strong performance by Foley, however lower margins resulted in a net loss of $0.6 million compared to net income of $1.2 million in 2009. The construction segment is expected to show improved sales and earnings benefiting from a 95% increase in the backlog for 2011.


This segment consists of the following two subsidiaries:

  • Northern Pipe Products, Inc. manufactures high quality PVC pipe products to exact specifications. The company's products are shipped to 16 states and Canada from its facility located in Fargo, North Dakota.
  • Vinyltech Corporation is a manufacturer of American Water Works Association C900 and C905 water main and ASTM D3034 and F679 sewer main PVC pipe products.

The plastics segment showed strong results in 2010 with a nearly 21% increase in revenues and reversed a loss of $0.1 million to show a profit of $2.5 million in 2010. The increase resulted from a 4.1% increase in pounds of pipe sold and a 16.2% increase in price per pound. The performance of the plastics segment in 2011 is expected to be in line with its 2010 results.

Health Services

DMS Health Technologies, Inc. sells diagnostic and patient monitoring equipment to the medical field. The company also offers diagnostic imaging services and equipment. In addition, DMS offers equipment maintenance and a technical staff to support its equipment and services.

Revenues decreased nearly 9% in 2010 due to a drop in scanning and related services. Net income came in at $0.2 million which reverses a loss from the previous year. The health services segment is expected to provide improvements in net income as a result of the ongoing benefits recognized by the asset reduction plan.

Food Ingredients

Idaho Pacific Holdings, Inc. is a manufacturer of dehydrated potato products including flour, granules and flakes. The company's products are sold primarily to the snack food, baking and foodservice industries and are shipped worldwide.

Revenues for 2010 were down slightly to $77.4 million, however the company posted record earnings of $8.0 million. For 2011, management does not believe it will match the record earnings that were achieved in 2010.


The generation and transmission of electricity still provides more revenues and earnings than any other individual segment of the business. It also accounts for more then 60% of the total identifiable assets. While several of the non-regulated segments struggled through the economic downturn, the electric power segment provided some underlying stability. Management believes the non-regulated businesses that have been soft for the last few years should start to see some improvement in 2011. Management is forecasting earnings for 2011 to be in the $1.00 to $1.40 per share range. If the company is able to deliver the higher end of that range, shares should move higher.

If it is purely growth that you seek, I think there are better options than Otter Tail, however with a 5.2% dividend and operations that seem to be improving, Otter Tail could provide an option for income investors looking for modest price appreciation potential. After lagging the major indexes in 2010, I believe Otter Tail could provide a return of 10%-15% in 2011 when you take into account the 5.2% dividend yield. Of course this assumes management is able to execute during what is still a soft market for many of its businesses.

Source: Otter Tail Corporation

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

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