Otter Tail Corp (NASDAQ:OTTR) Passes Peter Lynch's GARP Investment Screen

For investors looking for a disciplined, long-term method to build wealth, few strategies are as respected as Peter Lynch's methodology. The famous manager of the Fidelity Magellan Fund supported investing in what you understand, concentrating on companies with clear businesses, maintainable growth, and good financials. His system is a key part of the "Growth at a Reasonable Price" (GARP) philosophy, which aims to stay away from the extremes of speculative growth stocks and deep-value turnarounds. Rather, it looks for companies increasing steadily and profitably, but whose shares are not too expensive in the market. A stock screener created on Lynch's ideas can help find such candidates, sorting for profitability, financial strength, and price.

One company that recently appeared from such a screen is Otter Tail Corp (NASDAQ:OTTR). This varied holding company works in electric utilities, manufacturing, and plastics, serving markets mainly in the Upper Midwest and Western United States. On the surface, its business lines in PVC pipe and contract machining may seem very ordinary, a trait Lynch frequently liked, as it can mean a company is not noticed by Wall Street. A closer examination of its financial numbers shows why it matches a GARP strategy.

Matching Lynch's Main Rules

The Peter Lynch screen uses particular filters to find companies with a balanced mix of growth, profitability, and steadiness. Otter Tail Corp's present numbers show a good match with these rules:

• Maintainable Earnings Growth: Lynch preferred companies increasing earnings per share (EPS) between 15% and 30% each year over a five-year span, seeing this range as maintainable. OTTR's five-year EPS growth rate of 26.9% fits well within this target area, showing a good historical record of profitable increase.
• Sensible Price (PEG Ratio): Maybe the most important Lynch number is the Price/Earnings to Growth (PEG) ratio, which connects a stock's price to its growth rate. A PEG of 1 or less implies the market may be pricing the growth too low. OTTR's PEG ratio, using its past five-year growth, is 0.46, hinting at a possibly good price compared to its historical growth path.
• Good Profitability (ROE): Return on Equity (ROE) checks how well a company creates profits from shareholder equity. Lynch wanted a minimum of 15%. OTTR's ROE of 15.24% meets this level, showing management is using capital well to create value for owners.
• Firm Financial Strength (Debt & Liquidity): To confirm durability, Lynch filtered for companies with a Debt-to-Equity ratio below 0.6 (wanting even lower) and a Current Ratio above 1. OTTR satisfies both conditions easily, with a Debt/Equity ratio of 0.57 and a strong Current Ratio of 3.57. This points to a careful capital setup and enough cash to cover near-term needs.

Basic Health Review

A wider fundamental analysis of Otter Tail Corp supports the image shown by the Lynch screen. The company gets a firm total rating, with its positives focused in two main areas:

• Excellent Profitability: OTTR's profitability score is very high. Its profit margin of over 21% and return on invested capital (ROIC) of 7.74% are in the highest group of its electric utility industry group. This high level of operational effectiveness is a central idea of any long-term investment.
• Firm Financial Strength: The company's health score is positive, supported by very good liquidity numbers. Its high Current and Quick Ratios show it has plenty of resources to cover short-term debts, giving a safety buffer.

The analysis does mention some points for thought. While past growth has been good, recent earnings have weakened, and future EPS growth predictions are now negative, suggesting possible cyclical pressures in its manufacturing and plastics parts or higher capital spending. Also, its dividend yield of 2.56%, while steady and rising, is a bit under the industry average. These items lead to a lower growth rating and point out the need to understand the business cycles present in OTTR's varied model.

A Pick for the Long-Term Investor

For an investor using a Peter Lynch-style GARP method, Otter Tail Corp offers an interesting example. It is not a very high-growth story, but a financially sound company with a clear history of notable earnings growth, trading at a price that seems to account for its recent and expected slowdown. Its work in essential utilities and industrial areas fits with Lynch's thought of investing in clear, "ordinary" businesses that are central to the economy. The high profitability and firm balance sheet give a base of quality and risk reduction.

Investment strategies are a beginning for study, not a conclusion. The Peter Lynch screen is made to find companies deserving of more detailed examination. You can see the present list of stocks passing this screen and change the rules to fit your own study here: View the Peter Lynch Strategy Screen.

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Disclaimer: This article is for information only and is not financial advice, a suggestion, or an offer to buy or sell any security. The study is based on data and a set screening method; investors should do their own complete research and think about their personal financial position and risk comfort before making any investment choices.