Company Reports

Our CHF 220 per share fair value estimate is intact and our 2024 estimates for wide-moat Schindler remain largely unchanged, with the group’s first-quarter trading performance tracking broadly in line with our full-year expectations. First-quarter order intake of CHF 2.8 billion represented a 2.5% constant-currency increase year on year, broadly in line with our full-year expectations for 2.7% constant-currency order growth in 2024.

Schindler is an industry leader and one of the four largest globally active elevator and escalator original equipment manufacturers. As an integrated player, its operations span manufacturing, installation, and elevator and escalator servicing. Schindler also performs elevator modernization services for elevator systems at the end of their typical 15- to 20-year useful life. Schindler commands an approximate 15% share of the estimated $80 billion global elevator and escalator market.

Wide-moat Schindler Holding delivered a buoyant fourth-quarter 2023 result that highlights the underlying resilience of its business model. Fourth-quarter order intake pleased investors, rising 1.5% year on year in constant-currency terms, with strong demand for modernization and maintenance service in late 2023 offsetting continuing weakness in orders for new equipment. Full-year 2023 order intake was CHF 11.4 billion in 2023—up 1.7% on a constant-currency basis, broadly according with our full-year expectations for modest growth in order intake as Schindler’s order intake returned to growth in the second half. Schindler’s top line also tracked our expectations in 2023, with full-year revenue increasing to CHF 11.5 billion, up 7% year on year in constant-currency terms. Nonetheless, full-year 2023 EBIT of CHF 1.25 billion was slightly ahead of our expectations owing to better realization of operational and supply chain efficiencies than we’d previously credited.

Demand for new elevator installations remains weak globally in late 2023. Nonetheless, wide-moat Schindler Holding pleased investors, growing new order intake by 3.8% in the third quarter, in local currency terms, spurred on by continued strength in service and modernization orders that offset ongoing cyclically weakened orders for new equipment. The resilience of service and modernization orders reinforces Schindler’s order book—which stood at a pleasing CHF 9.3 billion at the end of the third quarter. In turn, Schindler’s order book should continue to support robust sales growth through the remainder of 2023, having advanced at 8.5% in the first nine months of 2023 in local currency terms. Our 2023 estimates for Schindler are largely unchanged—we forecast full-year net profit of CHF 905 million, near the top end of Schindler’s upwardly revised CHF 880 million-CHF 910 million guided range. Investors warmed to the result with shares up 3% at the time of writing. Still, Schindler’s shares screen as undervalued, trading at an approximate 15% discount to our unchanged CHF 210 fair value estimate.

Schindler is an industry leader and one of the four largest globally active elevator and escalator original equipment manufacturers. As an integrated player, its operations span manufacturing, installation, and elevator and escalator servicing. Schindler also performs elevator modernization services for elevator systems at the end of their typical 15- to 20-year useful life. Schindler commands an approximate 15% share of the estimated $80 billion global elevator and escalator market.

Wide-moat Schindler achieved strong constant-currency sales growth of 15% in the second quarter, with a robust order book supporting new equipment and modernisation revenue. Schindler’s service business also grew strongly across all geographies, bolstering second-quarter top-line growth. Our expectations for Schindler remain largely unchanged, forecasting full-year net profit of CHF 899 million, at the top end of Schindler’s CHF 860 million-CHF 900 million guided range. Investors welcomed the result with Schindler shares up 5% at the time of writing, having likely warmed to the strength of Schindler’s second-quarter new order intake—relative to peers and against a difficult market environment for new equipment. Schindler shares screen as approximately fairly valued, trading at a 2% discount to our unchanged CHF 210 fair value estimate.

We’ve lifted our fair value estimate for Otis Worldwide by 30% to $95 per share following a transfer of coverage and a fresh look at our long-term thesis. We are more positive on the secular growth opportunity in elevator modernization that awaits Otis and its major original equipment manufacturer peers in the coming decade. This opportunity is immense—about half of Europe’s and North America’s elevators are more than 20 years old and therefore ripe for modernization—and offers a timely offset to the earnings headwind posed by the likely structural slowdown in new elevator installations over the coming decade. Otis is our top pick from our elevator OEM coverage, trading at a 7% discount to our revised fair value estimate. We’re attracted to Otis’ enviable elevator service portfolio, which is the industry’s largest with an installed base of 2.2 million units under maintenance globally.

Schindler is an industry leader and one of the four largest globally active elevator and escalator original equipment manufacturers. As an integrated player, its operations span manufacturing, installation, and elevator and escalator servicing. Schindler also performs elevator modernization services for elevator systems at the end of their typical 15- to 20-year useful life. Schindler commands an approximate 15% share of the estimated $80 billion global elevator and escalator market.

China’s weak property market and global macroeconomic uncertainty are still weighing on Schindler’s results. New installations in China are down by more than 10% year over year, with Europe and the Americas down by 0% to 5% and Asia, excluding China, being the only region to grow, at 5% to 10%. Although the Chinese market seems to have bottomed already in terms of floor space sold and housing inventory, it is still unclear how long the recovery will take. The generalized increase in interest rates across the world has also put many new real estate developments on hold, slowing demand for new installations of elevators. The order intake was down 5% organically in the first quarter, mainly driven by China. We maintain our CHF 210 fair value estimate, with shares trading at CHF 196 on April 20.

Schindler's long-term revenue growth is modest, but stable. Roughly 70% of group revenue comes from Western markets, where growth is dependent on upgrades to existing elevators as opposed to new installation growth. (Developing markets have higher new installation growth potential due to urbanization and multidwelling unit growth.) The U.S. and Europe account for roughly 60% of the global market for elevator existing upgrades or "modernizations." While revenue growth from modernization might be slower in the short term relative to new installations, they can underpin margins and returns as they offer lower cost revenue from a sales standpoint. Modernizations eventually become required spending by customers due to safety reasons and are mainly carried but the OEM.

We are maintaining our CFH 210 fair value estimate and wide moat rating after incorporating Schindler’s solid full-year 2022 results into our model. Like other elevator original equipment manufacturers, Schindler’s margins and inventory levels are currently distorted by long lead times in executing on the order backlog. Supply chain constraints over the past several quarters have led to unusually high inventory levels, and a backlog with more favorable pricing to come in later project executions. On the margin side, higher-priced orders will not likely convert into better group margins until second-half 2023. Similarly, the higher building inventory will not likely release working capital cash flows until second-half 2023 as well. Taking these factors into account our medium-term forecasts include operating margin forecasts that climb back up to precoronavirus (and resulting supply chain shortages that followed) levels not until 2025.

Schindler's long-term revenue growth is modest, but stable. Roughly 70% of group revenue comes from Western markets, where growth is dependent on upgrades to existing elevators as opposed to new installation growth. (Developing markets have higher new installation growth potential due to urbanization and multidwelling unit growth.) The U.S. and Europe account for roughly 60% of the global market for elevator existing upgrades or "modernizations." While revenue growth from modernization might be slower in the short term relative to new installations, they can underpin margins and returns as they offer lower cost revenue from a sales standpoint. Modernizations eventually become required spending by customers due to safety reasons and are mainly carried but the OEM.

We maintain our wide moat rating and CHF 210 fair value estimate for Schindler after the company reported another sluggish quarter, as the results were in line with our forecasts. The book/bill fell below 1 times and the operating margin remained in single digits, below midcycle levels for the business. Orders were down 6% in the quarter year over year and revenue up by just 1.7%. The adjusted EBIT margin came in at 8.9%, contracting by 250 basis points year over year. While the company has been raising prices in the Americas and Europe, the impact from those increases will not flow through to the margins for perhaps a year or longer as elevator orders typically take 12 to 24 months to full execution, a situation that is prolonged even more by current supply chain challenges. The company's restructuring efforts to simplify the manufacturing process has also yet to bear fruit and wage inflation could still cause further headwinds in the near term.

Schindler posted a poor second-quarter performance and lowered 2022 revenue guidance, leading us to take a 7% haircut to our fair value estimate to CHF 210 from CHF 225. We lower our 2022 operating income forecast by 22%, factoring in a 1% revenue decline (previously +2.7%) and a 190-basis-point haircut to our EBIT margin to 8.1%. However, we do not see the 2022 revenue shortfall as demand destruction and expect to see a rebound in growth once the Chinese market and supply issues normalize, likely later this year. For 2023, we model in above cycle 6.5% revenue growth. We also expect the business to recover most of the 2022 margin contraction over time. Looking to our 2026 forecast, our operating income is only 7% lower than our previous forecast. We end our explicit forecast period with a 12% operating income margin in 2026, just 50 basis points lower than our previous forecast. We maintain our wide moat rating.

Schindler's long-term revenue growth is modest, but stable. Roughly 70% of group revenue comes from Western markets, where growth is dependent on upgrades to existing elevators as opposed to new installation growth. (Developing markets have higher new installation growth potential due to urbanization and multidwelling unit growth.) The U.S. and Europe account for roughly 60% of the global market for elevator existing upgrades or "modernizations." While revenue growth from modernization might be slower in the short term relative to new installations, they can underpin margins and returns as they offer lower cost revenue from a sales standpoint. Modernizations eventually become required spending by customers due to safety reasons and are mainly carried but the OEM.

Schindler reported a mixed first quarter with year-over-year growth in orders and revenue but a margin contraction driven largely by steel cost inflation. The company's operating profit margin contracted by 100 basis points year over year to 8%. Supply chain disruptions continued to affect order execution with the book/bill ratio above 1 times, at 1.2 times, and order growth outpaced revenue growth significantly. Orders grew by 7.7% while revenue was up just 1%. We maintain our fair value estimate and wide moat rating.

Schindler's long-term revenue growth is modest, but stable. Roughly 70% of group revenue comes from Western markets, where growth is dependent on upgrades to existing elevators as opposed to new installation growth. (Developing markets have higher new installation growth potential due to urbanization and multidwelling unit growth.) The U.S. and Europe account for roughly 60% of the global market for elevator existing upgrades or "modernizations." While revenue growth from modernization might be slower in the short term relative to new installations, they can underpin margins and returns as they offer lower cost revenue from a sales standpoint. Modernizations eventually become required spending by customers due to safety reasons and are mainly carried but the OEM.

Schindler's stock sold off by around 5% at the time of writing with the new management warning of a 20% drop in first-half 2022 adjusted operating profit year over year. Shares are trading modestly below our fair value estimate, which we maintain along with our wide moat rating. Schindler has clearly lagged on execution relative to peers Kone and Otis, long trailing both on margins but 2022 guidance implies an even lower margin, which we estimate down around 100 basis points below the 11% reported in 2021. However, we think new management may be wiping the slate clean, or "kitchen-sinking," with the margin pressure warning ahead of its strategy announcement sometime in the summer. We see the margin weakness guided for the first half as driven by temporary factors and self-inflicted wounds, with raw material cost inflation and the company's own spend to connect its elevator base.

Schindler management expects 2022 to be a slower year in China's new installation growth after government-imposed restrictions on new debt issues to property developers and mortgages to individuals. We share management's view that eventually, credit is likely to become looser; however, we would not expect a full recovery in demand due to the shorter growth runway for the relatively high urbanization rate and likely lower speculative demand for land and property purchases. China's urbanization rate is now 61%, from 51% in 2012, boosted by years of property sector growth and narrowing gap with more mature markets. This leaves a shorter runway for above-average sector growth. Running a scenario analysis, isolating our estimated exposure for Schindler to China's new installations, we see potential 7%-10% downside risk to our fair value estimate if the underlying base level of China's new equipment demand is 10%-25% lower than we previously expected. We maintain our fair value estimate and wide moat rating.

Should the Chinese property market spiral into lower property prices and sales and a broader developer liquidity crunch as a result of Evergrande's potential collapse, we believe the near-term credit loss risk for European capital goods suppliers will be moderate and manageable. From a valuation standpoint, the greater risk is a step down in medium-term Chinese property market growth prospects if banks tighten lending to property developers. For now, however, we are making no changes to our ratings or valuations.