Every Monday we feature “A Stock to Sell” as our daily post. With every stock or investment we recommend as a sell, we give you a full explanation of why we advise against investing in it at this time.
Otter Tail Corporation (symbol OTTR on Nasdaq; www.ottertail.com) is the parent of Otter Tail Power Company, which supplies electricity to over 130,000 customers. Otter Tail Corporation also has manufacturing, plastics and construction operations.
Otter Tail Power Company’s customers are in a 50,000-square-mile area that covers parts of Minnesota (48% of electrical revenue), North Dakota (43%) and South Dakota (9%). Commercial and farm clients supply 37% of electrical revenue, followed by residential (33%), industrial (23%) and other (7%).
Here’s a look at Otter Tail Corporation’s other main segments:
The manufacturing division makes, stamps, welds and laser cuts metal parts for a number of applications, including recreational vehicles; farm, lawn and garden equipment; mining machinery; offshore oil rigs; wind turbines; and broadcast antennas.
This segment also makes and sells thermoformed (or moulded plastic) products for the horticulture industry, as well as products for shipping and storing odd-shaped or difficult-to-handle parts. Examples include clamshell packing, blister packs and returnable pallets.
The plastics segment makes and sells polyvinyl chloride pipes for municipal water, wastewater and storm drainage systems, among other uses.
The construction segment provides mechanical and contracting services for water- and wastewater-treatment facilities, power plants, hospitals and industrial and manufacturing projects.
12 Days of Christmas—Day Eleven: Ask Pat: A Taste of the Inner Circle
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Stock advice: Otter Tail considering a sale of low-profit construction segment
In the three months ended September 30, 2014, Otter Tail’s revenue rose 5.5%, to $242.4 million from $229.8 million a year earlier. Electricity sales accounted for 37% of the company’s revenue in the latest quarter, followed by manufacturing (23%), plastics (21%) and construction (19%). Earnings per share rose 2.4% to $0.43 from $0.42.
The stock yields 4.1%, but the company faces several types of risk. For example, its electric segment operates in just one geographic area, and its manufacturing and plastics businesses are mainly small cyclical operations in competitive markets.
Otter Tail is also looking at alternatives for its low-profit construction segment, including a potential sale of the business.
We don’t recommend Otter Tail. If you own the shares, we think you should sell.
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