$42.00
$73.00
bear $42.00
base $60.00
bull $73.00
margin of safety $36.00
market price* $90.13
Business condition attached to the margin of safety
Clarity that the PVC pipe antitrust class actions and Department of Justice investigation are resolved for a total cost close to the roughly $103.5 million already charged in the second quarter of 2026, with no further material exposure.
Otter Tail owns three businesses: Otter Tail Power, a regulated electric utility serving Minnesota, North Dakota and South Dakota; a Manufacturing segment (metal fabrication and thermoformed plastics, mainly for agricultural, RV, lawn and other equipment makers); and a Plastics segment that makes PVC water and sewer pipe in Fargo, North Dakota and Phoenix, Arizona. Electric earned $97.6 million in 2025 (up 7%), Plastics $170.4 million (down 15%) and Manufacturing $11.5 million (down 16%). Roughly two-thirds of 2025 profit therefore came from businesses whose results are far above their pre-2021 level: PVC pipe prices peaked in 2022, fell another 15% in 2025, and management itself expects the market to keep normalizing through 2027. In 2020, before the boom, the two non-utility segments together contributed only about 30% of a $95.9 million total profit. How we measure earnings. We start from operating cash flow, remove swings in working capital, subtract stock compensation as a real cost, and subtract the capital spending needed to keep the business going (spending on growth is treated separately when revenue is rising). On that basis owner earnings per share were: 2016 -$0.24, 2017 $1.52, 2018 $1.50, 2019 -$1.19, 2020 -$4.55, 2021 $4.34, 2022 $6.60, 2023 $2.34, 2024 $1.30, 2025 $2.90. The swings come mainly from the wind-farm and generation build-out (capital spending of $372 million in 2020, $359 million in 2024) and from the PVC price spike in 2021-2022. Because the business changed materially after 2020, we look at 2021-2025, whose median is about $2.90 per share, and we do not treat the 2022 peak as normal. Recent growth in owner earnings (2025 was more than double 2024) is not something we extrapolate: it reflects lower capital spending, and our first-year assumption is a decline as PVC pricing keeps normalizing. A legal matter that matters. Otter Tail, its Northern Pipe Products and Vinyltech subsidiaries and over 20 other companies face US and Canadian class actions and a Department of Justice investigation alleging PVC pipe price-fixing; a shareholder has also demanded the board investigate. The 10-K says the outcome could not be estimated. The company's second-quarter 2026 report shows a $103.5 million litigation charge and an operating loss for the quarter, which we treat as the cost of resolving part or all of this (we could not read the quarterly filing text itself, so what the charge covers, and whether it closes the matter, is not confirmed). Every case below deducts the after-tax cost, about $77 million or $1.83 per share. Base case, about $60 per share. Electric earnings stay at $97.6 million and grow only through rate-base investment that is already committed or demonstrably routine: the utility plans $436 million (2026) and $547 million (2027) of spending on renewable generation and storage and MISO transmission, with about $300 million a year afterward, in line with the $271-301 million spent in 2024-2025, and $100 million a year through 2035, each dollar earning about 7.2% (rate cases have allowed 7.18-7.53% on rate base and roughly 9.5-10.1% on equity). Because we deduct all of that spending as it happens, it is a heavy drag in 2026-2027 (owner earnings turn negative) before returns arrive. Manufacturing and Plastics profit falls from about $178 million in 2025 to about $145 million in 2026, $90 million in 2027 and $50 million thereafter, above the roughly $29 million of 2020 because of the Phoenix capacity and large-diameter capability installed in late 2024. After the investment program ends, earnings are held flat rather than grown; the regulated franchise keeps producing them, but nothing named supports more. Bear case, about $42 per share. Rate-base spending stops after the committed 2026-2027 projects and earns 6.5%; non-utility profit drops to $25 million, below 2020; and the pipe litigation costs a further $250 million after tax beyond what is already charged. The utility carries $1.1 billion of debt with $805 million due beyond five years, which limits room to absorb a larger settlement. Bull case, about $73 per share. Plastics and Manufacturing hold about $75 million and the full utility plan (about $2.05 billion of spending 2026-2030, then $150 million a year through 2035) is carried out at the allowed returns. We do not assume PVC pricing recovers, market growth, or acquisitions, since none can be evidenced today. What we left out and why. We did not credit non-utility growth, share gains, new products or margin expansion. We also did not add credit for debt funding of capital projects, so the estimate is conservative for a leveraged, growing utility. Amortization and non-cash charges are small and do not distort the result. Two items could not be fully reconciled: the exact scope of the second-quarter 2026 litigation charge, and the level of profit Plastics settles at once pricing normalizes. If Plastics settles nearer the 2020 level, value would be lower by roughly $8 per share; a legal cost well beyond our bear case, or regulators trimming allowed returns, would also make these estimates too high.