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Otter Tail Corporation's (NASDAQ:OTTR) Price Is Out Of Tune With Earnings

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Simply Wall St
·3 min read
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With a median price-to-earnings (or "P/E") ratio of close to 18x in the United States, you could be forgiven for feeling indifferent about Otter Tail Corporation's (NASDAQ:OTTR) P/E ratio of 17x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Otter Tail has been doing quite well of late. One possibility is that the P/E is moderate because investors think the company's earnings will be less resilient moving forward. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

See our latest analysis for Otter Tail

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Keen to find out how analysts think Otter Tail's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Otter Tail's Growth Trending?

The only time you'd be comfortable seeing a P/E like Otter Tail's is when the company's growth is tracking the market closely.

Retrospectively, the last year delivered a decent 7.9% gain to the company's bottom line. The latest three year period has also seen a 24% overall rise in EPS, aided somewhat by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 5.8% per annum as estimated by the three analysts watching the company. With the market predicted to deliver 13% growth per year, the company is positioned for a weaker earnings result.

With this information, we find it interesting that Otter Tail is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

The Final Word

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Otter Tail currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

You should always think about risks. Case in point, we've spotted 2 warning signs for Otter Tail you should be aware of.

Of course, you might also be able to find a better stock than Otter Tail. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.