• Wondering if Otter Tail is fairly priced or if the stock is offering value at its current level of US$88.89? This article breaks down what the numbers are really saying.
• The stock has returned 0.8% over the last week, 0.4% over the past month, 9.1% year to date and 19.5% over the last year, with a 3 year return of 21.1% and a 5 year return of 114.0%. This provides plenty of history to weigh against today's price.
• Recent coverage has focused on Otter Tail in the context of evergreen analysis, with investors paying close attention to how its regulated utilities and related operations are reflected in market pricing. This backdrop matters because it shapes how investors interpret the stock's risk profile and return potential when assessing value.
• On Simply Wall St's 6 point valuation checklist, Otter Tail scores 3 out of 6. Next up is a closer look at how different valuation methods stack up for this stock and why there may be an even more useful way to think about value by the end of the article.

Approach 1: Otter Tail Dividend Discount Model (DDM) Analysis

The Dividend Discount Model estimates what Otter Tail might be worth by projecting future dividends and discounting them back to today, then comparing that value to the current share price of US$88.89.

For Otter Tail, the model uses an annual dividend per share of about US$2.58, a return on equity of 20.06% and a payout ratio of 25.94%. That payout level suggests room to keep funding the dividend while retaining a large share of earnings within the business.

The model applies a long term dividend growth rate of 3.54%, which is capped from a higher calculated growth rate of 14.86%. Based on these inputs, the DDM output points to an estimated intrinsic value of about US$72.36 per share.

Compared with the current price of US$88.89, the DDM indicates the stock is around 22.8% above this dividend based valuation, so the market price sits at a premium to what this model suggests is reasonable today.

Result: OVERVALUED

Our Dividend Discount Model (DDM) analysis suggests Otter Tail may be overvalued by 22.8%. Discover 44 high quality undervalued stocks or create your own screener to find better value opportunities.

Approach 2: Otter Tail Price vs Earnings

For a profitable company like Otter Tail, the P/E ratio is a useful way to gauge how much you are paying for each dollar of earnings. Investors generally accept that higher growth expectations or lower perceived risk can justify a higher P/E, while slower growth or higher risk usually call for a lower, more cautious multiple.

Otter Tail currently trades on a P/E of 13.30x. That compares with an Electric Utilities industry average P/E of 21.65x and a peer average of 27.39x, so the stock is on a lower multiple than both of those benchmarks. However, simple comparisons like this do not adjust for Otter Tail's specific growth outlook, profitability, size and risk profile.

Simply Wall St's Fair Ratio metric is designed to do exactly that. It estimates what a more tailored P/E might look like after factoring in earnings growth, profit margins, industry, market cap and risk, rather than relying only on broad peer or industry averages. For Otter Tail, the Fair Ratio is 13.55x, which sits slightly above the current 13.30x P/E, suggesting the stock is modestly below that customised valuation yardstick today.

Result: UNDERVALUED

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Upgrade Your Decision Making: Choose your Otter Tail Narrative

Earlier it was mentioned that there is an even better way to understand valuation. Narratives are introduced here as simple stories that you and other investors attach to the numbers, connecting your view of Otter Tail's future revenue, earnings and margins to a forecast and a fair value that can then be compared with the current price.

On Simply Wall St's Community page, Narratives are available as an easy tool that millions of investors use to set their own fair value, see it side by side with today's share price and decide whether that gap suggests Otter Tail is closer to a buy, a hold or a sell for their personal approach.

Narratives are updated when fresh information like news, earnings and guidance arrives. For example, an analyst consensus fair value of US$86.50 for Otter Tail, based on assumptions such as 3.06% revenue growth, a 13.04% profit margin and a future P/E of about 23.90x, can sit alongside other investor Narratives that use either more cautious numbers or more confident ones and produce lower or higher fair values from the same starting point.

Do you think there's more to the story for Otter Tail? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.