Otter Tail Corp (NASDAQ:OTTR) Fits Peter Lynch’s Growth at a Reasonable Price (GARP) Strategy

Peter Lynch’s investment strategy, described in One Up on Wall Street, centers on finding companies with steady growth at fair prices, commonly known as the Growth at a Reasonable Price (GARP) method. The approach highlights key financial measures like earnings growth, profitability, and financial stability while steering clear of overly speculative or heavily indebted firms. By selecting stocks with solid but not extreme earnings growth, fair valuations compared to growth (PEG ratio), and strong financial positions, Lynch’s strategy seeks to identify long-term performers that can grow returns consistently.

Otter Tail Corp (NASDAQ:OTTR) appears to fit this model. The company works in electric utilities, manufacturing, and plastics, a mix of straightforward industries that match Lynch’s preference for easy-to-understand businesses. Below, we explore why OTTR aligns with the strategy’s main requirements.

Why Otter Tail Corp Matches the Peter Lynch Criteria

1. Steady Earnings Growth

   • Lynch liked firms with reliable but not overly aggressive earnings growth, usually between 15% and 30% per year. OTTR’s 5-year EPS growth of 26.89% fits this range, showing solid historical results without reaching unrealistic levels.
   • However, analysts expect a short-term EPS drop of -8.05%, which needs closer examination. Investors should determine if this decline is temporary or part of a larger trend, as Lynch focused on long-term patterns over short-term changes.

2. Fair Valuation (PEG Ratio ≤ 1)

   • A key part of Lynch’s strategy is the PEG ratio, which accounts for growth when evaluating the P/E ratio. OTTR’s PEG ratio of 0.45 (based on the last 5 years of growth) suggests the stock is priced below its earnings potential.
   • The current P/E of 12.07 is also lower than the industry average (14.87) and the S&P 500’s (26.93), strengthening the case for its value.

3. High Profitability (ROE > 15%)

   • Return on equity (ROE) shows how well a company turns shareholder investments into profits. OTTR’s ROE of 16.13% exceeds Lynch’s 15% benchmark and beats 87% of its utility sector peers.
   • Strong operating margins (27.13%, better than 89% of the industry) further highlight its profitability.

4. Solid Balance Sheet (Debt/Equity < 0.6)

   • Lynch favored companies with low debt. OTTR’s debt-to-equity ratio of 0.59 meets his upper limit, though he preferred ratios under 0.25. Still, this puts OTTR ahead of 81% of industry competitors.
   • Liquidity is strong, with a current ratio of 3.31, showing it can easily meet short-term obligations.

5. Reliable Dividends

   • While not a strict Lynch requirement, OTTR’s 2.63% dividend yield, along with a 6.09% yearly dividend growth rate and a manageable payout ratio (29% of earnings), adds value for income-seeking investors.

Fundamental Overview

Our full fundamental analysis scores OTTR 6/10, noting strengths in profitability and financial health but raising questions about slowing growth. Key points:

• Profitability: Strong margins and ROE.
• Valuation: Fair multiples relative to growth.
• Debt: Acceptable but higher than Lynch’s ideal.
• Growth: Past results are good, but near-term challenges exist.

Is OTTR a Lynch-Style Pick?

OTTR meets several GARP investor criteria: fair valuation, historical growth, and profitability. However, the expected earnings drop demands attention. Lynch stressed understanding a company’s long-term drivers—OTTR’s mix of utility and industrial operations may provide stability, but investors should evaluate if its growth slowdown is short-lived.

For more stocks that fit the Peter Lynch strategy, check our pre-built screen here.

Disclaimer: This article is not investment advice. Do your own research or consult a financial advisor before making investment decisions.