Wind-Power Stock Suffers Blowout

Firm That Invests in Alternative Energy Fails to Impress; 'Market Is Pretty Penal if You Don't Deliver' on Promises

Wind-power stocks can be as fickle as the wind itself.

Shares of Otter Tail Corp., a diversified company with businesses in food-ingredient processing, plastics and wind-tower manufacturing, dropped sharply Tuesday, losing 19% to $36.16 after the company's earnings report showed the wind sector isn't blowing in the sort of profits investors expected.

Otter Tail shares have rallied ever since wind became fashionable with alternative-energy investors such as oil man T. Boone Pickens. Before Tuesday, the stock had climbed 29% for the year, and it hit a 52-week high of $46.15 July 30.

But Otter Tail's net income dropped to 11 cents a share in the second quarter, down 79% from 53 cents a year earlier. The company also lowered expectations for coming quarters for the second time this year, citing, among other factors, higher materials costs.

"This market is pretty penal if you don't deliver on your promises, especially if you are at a premium value and are in a space that's supposed to be doing well," said Andrew Meister, portfolio manager at Thrivent Investment Management, who holds the shares.

Part of the problem for investors is that the company is tight-lipped about its results in the wind business. The wind division, run by a subsidiary called DMI Industries, is folded into the company's manufacturing division, which also includes several other businesses. The company doesn't report specific revenue and income for each unit.

For this quarter, manufacturing brought $1.4 million in net income, compared with $5.3 million a year ago. Increased costs at DMI's Tulsa, Okla., plant resulted in a $2.2 million decline in DMI's earnings, the company reported, without saying what the overall results were.

"They tell you the [earnings] change in that business for the most recent quarter but we don't know from what base, or what the new number is," says James Bellessa Jr., an analyst at D.A. Davidson, whose firm makes a market in the shares.

When Otter Tail cut its guidance after releasing earnings in May, the stock fell just 3.5% the next day, suggesting "they got the benefit of the doubt," Mr. Meister said.

Not anymore. "Wind is where the growth is supposed to come from and it's what people are paying the premium multiple for," he said. "What you've found out is that there are growing pains here and the premium multiple should be re-evaluated."

By: David Gaffen
Wall Street Journal; August 6, 2008