Sirisak Boakaew/Moment via Getty Images
Sirisak Boakaew/Moment via Getty Images
Otter Tail Corporation (NASDAQ:OTTR) is a hybrid utility that has an electric segment, a manufacturing segment, and a plastics segment.
Given a strong EPS growth record in the last several years and also strong earnings results, Otter Tail stock has done well, with the stock price rising around 76.3% in the last five years, easily outperforming the broader utility sector.
While EPS has increased substantially in the past several years, management expects profits in Otter Tail's most profitable segment in 2023, its plastics segment, to begin to normalize, indicating a potential headwind for EPS in the future.
Beginning in 2021, Otter Tail's plastics segment benefited from abnormal industry conditions as resin shortages and strong demand for PVC pipe drove spread expansion.
Otter Tail Investor Presentation
As a result of the abnormal industry conditions, Otter Tail's plastics business earned a lot of profit. In terms of net income, the plastics segment earned $97.8 million in 2021, $195.4 million in 2022, and $187.7 million in 2023.
In terms of earnings per share, Otter Tail's plastics segment earned $4.66 per share in 2022 and $4.47 per share in 2023. By comparison, Otter Tail earned $7 per share in 2023.
While Otter Tail's plastics business has been very profitable in the last few years, resin prices have declined and sales prices have been gradually receding in recent quarters.
For 2024, management estimates that the plastics segment will earn $2.62 per share on the low end and $2.81 per share on the high end.
Further in the future, management estimates that the plastics segment will have an eventual normal level of earnings of between $45 million and $50 million, with the beginning of normalization beginning this year.
CEO Chuck MacFarlane said during the Q4 earnings call,
Yeah, at this point, we see the gradual decline in the spread over 2024 and into 2025. So ultimately, based upon our current projection, we wouldn't realize that normal level of earnings until 2026. So 2025 currently in our projections is elevated. If you look at the midpoint of our guidance, it would be about $2.72 for Plastics in 2024. A $45 million to $50 million of earnings would be about $1.10. So we expect it will gradually decline between '24 and '26.
In terms of its electric segment, Otter Tail Power, is a vertically integrated regulated utility that serves over 133,000 residential, commercial, and industrial customers across Western Minnesota, eastern North Dakota, and northeastern South Dakota.
The business has been a steady grower in recent years. From 2018 to 2023, Otter Tail Power has had 9% CAGR rate base growth, which has translated to 9% CAGR earnings growth. From 2023 to 2028, management estimates that its rate base CAGR will be 7.7%, which indicates more potential earnings growth over the next few years from that segment.
In terms of net income, Otter Tail's electric segment earned $72.5 million in 2021, $80 million in 2022, and $84.4 million in 2023.
One of the positives for the electric segment is that the company's rates are 15% below the regional average and 30% below the national average.
In recent years, Otter Tail's manufacturing segment has been pretty steady with earnings of $0.50 per share in 2022 and $0.51 per share in 2023, with favorable product mix and higher sales volumes at BTD Manufacturing partially offset by lower sales volumes at T.O. Plastics.
Otter Tail's manufacturing segment earned $17.2 million in 2021, $21 million in 2022, and $21.5 million in 2023.
For 2023, Otter Tail had a strong performance with net income of $294.2 million and diluted EPS of $7 per share, versus $284.2 million and $6.78 per share in 2022, respectively. Operating Revenues did decline to $1.3492 billion from $1.4602 billion, however.
In terms of segment performance, Otter Tail's electric segment generated diluted EPS of $2.01, its manufacturing segment generated diluted EPS of $0.51, and its plastics segment generated diluted EPS of $4.47.
In terms of capital returns, Otter Tail paid $1.75 per share in dividends in 2023, a 6% increase from 2022.
For 2024, management indicated an annual dividend of $1.87 per share, a 7% increase year over year.
Otter Tail Investor Presentation
For 2024, management has guided for diluted EPS of $5.13-$5.43 per share.
In terms of recent years, Otter Tail has had a good track record of earnings per share growth, with EPS rising from $2.06 per share in 2018 to $7 per share in 2023. From 2018 to 2023, the company has had a 11.6% consolidated EPS CAGR without plastics.
Given the abnormal profitable conditions in plastics, Otter Tail has a CAGR of 27.7% in terms of consolidated EPS including the plastics business over the same 2018 to 2023 time period.
Given the earnings growth, Otter Tail's stock has done really well over the last five years, rising over 76%. With the superb stock performance in the past, Otter Tail looks pretty fully valued now.
While the company earned $7 per share in 2023, Otter Tail's normalized earnings per share is lower by a fair amount.
In terms of normalized conditions according to my calculations, Otter Tail's normalized earnings in 2023 is around $3.63 per share given the company's normalized plastics segment earnings is around $1.10 per share and its consolidated EPS without its plastics business in 2023 was $2.53 per share.
Analysts also see EPS normalizing in the future.
For 2024, for instance, analysts on average expect Otter Tail to earn $5 per share, giving it a forward PE ratio of 18.05 as of February 20 according to Seeking Alpha.
As management has guided for 2024 diluted EPS of $5.13-$5.43 per share in an investor presentation on February 13, 2024, there is a chance that the analyst estimates may need to be revised higher for this year.
Nevertheless, with Otter Tail's plastics business profits expected to continue to normalize in 2025 and 2026, analysts have an average EPS estimate of $4.09 for 2025, and $3.84 for 2026, before expecting EPS to rise to $4.04 for 2027.
Given the stock price, Otter Tail has a forward PE ratio of over 22 for 2025, 2026, and 2027, which is pretty fully valued in my opinion.
Seeking Alpha
I think Otter Tail is a quality stock that is fairly unique in that it is a utility with other profitable segments in other sectors. Otter Tail stock has also performed really well in the past five years.
Nevertheless, Otter Tail's valuation is tough to get excited about, and as a result, I rate Otter Tail a 'Hold' as in 'sideline'.
Otter Tail has exceeded earnings estimates by a decent margin in the past few years, so the market could be expecting more than what analysts are expecting. Nevertheless, I think management is right in that the company's plastics profits will eventually normalize. I think this could be an EPS headwind, so if I were to own Otter Tail, I would probably be 'underweight' the stock and own it in a portfolio with the Magnificent Seven to benefit from innovation.