Company Reports

Wide-moat Otis Worldwide delivered a solid first-quarter result, illustrating the resilience of the industry-leading elevator original equipment manufacturer’s installed base business model amid a still soft environment for construction activity and demand for new elevator installations. First-quarter sales grew 3.8% organically and adjusted EBIT rose 8.3% year on year as Otis’ high profit margin service segment performed strongly. Otis has consequently tightened its 2024 guidance range, now expecting to deliver 3%-5% organic sales growth in 2024 and operating profit in the range of $2.42 billion-$2.46 billion. We’ve tweaked our estimates in response to the first-quarter result and now forecast full-year 2024 EBIT of $2.45 billion and EPS of $3.99.

Otis Worldwide is the largest elevator and escalator original equipment manufacturer globally with integrated operations that span manufacturing and installation activities, as well as elevator and escalator servicing for existing installations. Additionally, Otis performs elevator modernization services for elevator systems at the end of a typical 15- to 20-year useful life. Otis estimates the global E&E market was worth about $80 billion in 2021 with Otis commanding an approximate 18% global market share, based on revenue.

Otis Worldwide’s 2024 investor day left us feeling confident that the wide-moat stock remains well positioned to capitalize on growth opportunities that exist for its all-important elevator service business—for both its maintenance portfolio and in elevator modernizations—and to weather the ongoing cyclical and structural challenges, which prevail in new elevator equipment markets globally. Otis left its medium-term financial targets largely unchanged, which broadly accords with our existing estimates. As a result, we don’t expect to make a material revision to our $98 fair value estimate.

Otis Worldwide’s fourth-quarter 2023 performance largely tracked our full-year expectations, with the wide-moat stock delivering full-year EBIT of $2.27 billion and EPS of $3.54, representing respective 6.7% and 11.7% year-on-year increases. Operating income growth was supported by organic sales growth of 5.6%, resulting from the ongoing robust growth of Otis’ service business—the group’s most important segment accounted for approximately 70% of group EBIT. The group full-year 2023 EBIT margin widened by 30 basis points to 16.0%, spurred largely by solid EBIT margin progression of the service segment with increased service volumes, improved productivity, and price increases all contributing. Elsewhere, Otis’ smaller new equipment segment treaded water in 2023, with its EBIT contribution of $381 unchanged year on year amid subdued new equipment demand.

Our 2023 estimates for Otis Worldwide are little changed, with the wide-moat stock’s performance tracking largely in line with our expectations. Demand for new elevator equipment remained weak during the quarter. Still, we’ve nudged our full-year EBIT and EPS forecasts up by about 1% each—to USD 2.3 billion and USD 3.52, respectively—with Otis’ service and modernization business continuing to display considerable buoyancy in late 2023. Otis shares screen attractively relative to our unchanged USD 98 fair value estimate.

Otis Worldwide is the largest elevator and escalator original equipment manufacturer globally with integrated operations that span manufacturing and installation activities, as well as elevator and escalator servicing for existing installations. Additionally, Otis performs elevator modernization services for elevator systems at the end of a typical 15- to 20-year useful life. Otis estimates the global E&E market was worth about $80 billion in 2021 with Otis commanding an approximate 18% global market share, based on revenue.

Otis’ second-quarter 2023 performance offered us little surprise, tracking broadly in line with our full-year expectations. Organic sales growth accelerated, rising 9.5% year on year in the second quarter—up from about 4% in the first three months of 2023. Delivery of orders from Otis’ strong new equipment order book and elevated organic revenue growth for the service business both contributed to the hastened pace of top-line growth in the quarter. Our full-year 2023 earnings estimates are largely unchanged—we forecast EBIT of $2.27 billion and EPS of $3.50, a forecast 7% and 10% year-on-year increase, respectively. Still, we’ve nudged up our fair value estimate for the wide-moat stock by 3% to $98 to account for Otis’ newly announced plan to strip an annualized $150 million from its cost base over the coming two years. Otis shares screen as undervalued, trading at a 10% discount to our revised fair value estimate at the time of writing.

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.

Otis Worldwide is the largest elevator and escalator original equipment manufacturer globally with integrated operations that span manufacturing and installation activities, as well as elevator and escalator servicing for existing installations. Additionally, Otis performs elevator modernization services for elevator systems at the end of a typical 15- to 20-year useful life. Otis estimates the global E&E market was worth about $80 billion in 2021 with Otis commanding an approximate 18% global market share, based on revenue.

Wide-moat Otis' sales were up 3.6% at constant exchange rates in the first quarter of 2023 thanks to strong performance in service and modernization revenue, which were up 7.0% and 3.3%, respectively. We have seen the same narrative across our elevator coverage this quarter—while new orders and installations have been weak due to macroeconomic uncertainty and increases in interest rates that have put many new real estate developments on hold, service and modernization revenue is performing well. However, Otis has performed better than its peers on the new equipment front with orders up 7.4% at constant exchange rates, due to double-digit growth in both Americas and Asia-Pacific (excluding China). Management maintained its 2023 sales and operating profit guidance, only making slight changes to the earnings per share forecast. We are maintaining our $73 fair value estimate, with shares remaining in overvalued territory.

Otis is the largest elevator original equipment manufacturer, or OEM, by revenue globally and also boasts the highest operating profit margins of the three publicly listed elevator OEMs, including Kone and Schindler. It has longer-term opportunities to grow its lucrative service business. However, along with its peers, it faces a near-term slowdown in the Chinese new equipment market, which we estimate contributes just over 10% of the company's operating profits. China's property developer sector, which carries high levels of debt, will likely go through a multi-month restructuring process before normal development activity resumes. A proportionately larger revenue share from service (maintenance and spare parts) relative to competitors underpins the company's superior profitability. Close to 60% of the company's profits come from service, which delivers profit margins as much as three times that of new equipment and replacement ("modernization") unit EBIT margins.

Otis is the largest elevator original equipment manufacturer (OEM) by revenue globally and also boasts the highest operating profit margins of the three publicly listed elevator OEMs, including Kone and Schindler. It has longer-term opportunities to grow its lucrative service business. However, along with its peers, it faces a near-term slowdown in the Chinese new equipment market, which we estimate contributes just over 10% of the company's operating profits. China's property developer sector, which carries high levels of debt, will likely go through a multi-month restructuring process before normal development activity resumes. A proportionately larger revenue share from service (maintenance and spare parts) relative to competitors underpins the company's superior profitability. Close to 60% of the company's profits come from service, which delivers profit margins as much as 3 times that of new equipment and replacement ("modernization") unit EBIT margins.

Otis reported solid fourth-quarter and full-year 2022 results, in line with our 2022 expectations of 2.5% organic revenue growth, driven by services and a 30-basis-point operating income margin improvement, also helped by service revenue growth. Otis' 2023 guidance for 4%-6% organic revenue growth is in line with our forecasts. The company's order book provides a high level of visibility into 2023. Otis finished the year with a $18.2 billion backlog, including new equipment and services, up 6% year over year. Execution on these orders will drive revenue through 2023. We forecast revenue to grow 5% organically, or about double 2022's revenue growth rate. We are maintaining our wide moat rating and $73 fair value estimate. Shares look richly valued.

Similar to competitor Kone, Otis moderately lowered its 2022 revenue and earnings outlook due to the slower-than-expected recovery in China's property market. Importantly, the service business, which drives 80% of Otis' profits, continues to look strong. Management expects group revenue to grow 2.25% at the midpoint, down 75 basis points from the previous 3% midpoint. New equipment revenue is expected to decline 2.5% for the year, down more than 100 basis points from the previous guidance caused by China's weak property market. We expect the situation in China to drive the near-term earnings outlook and expect the market's recovery to last through 2023. However, global service revenue, the bread and butter of elevator manufacturers' profit pools, remains strong. We are maintaining our wide moat rating and fair value estimate.

Otis reported a mixed second-quarter 2022 for revenue, but still a solid profit margin with 20-basis-point margin expansion. Management modestly lowered upside on 2022 revenue growth guidance due to supply chain disruptions, as well as the impact of lockdowns in China. Management's guidance also now excludes new equipment revenue from Russia, which contributed 3.4% of new equipment sales and 1.7% of group sales in 2021. We revised down our forecasts modestly for Otis to account for supply chain and labor shortages, causing delays in 2022, order execution, as well as Russia impairment costs. Our 2022 adjusted EPS forecast is now $3.19, down from $3.22. However, these near-term adjustments were not material enough to alter our long-term forecasts or $73 fair value estimate. We also maintain our wide moat rating.

Otis is the largest elevator original equipment manufacturer (OEM) by revenue globally and also boasts the highest operating profit margins of the three publicly listed elevator OEMs, including Kone and Schindler. It has longer-term opportunities to grow its lucrative service business. However, along with its peers, it faces a near-term slowdown in the Chinese new equipment market, which we estimate contributes just over 10% of the company's operating profits. China's property developer sector, which carries high levels of debt, will likely go through a multi-month restructuring process before normal development activity resumes. A proportionately larger revenue share from service (maintenance and spare sparts) relative to competitors underpins the company's superior profitability. Close to 60% of the company's profits come from service, which delivers profit margins as much as 3 times that of new equipment and replacement ("modernization") unit EBIT margins.

There were no big surprises in Otis' full-year results, which were in line with our forecasts and management guidance. Guidance for 2022 is also broadly in line with our expectations, although the regional mix points to an expected decline in the Chinese new-equipment market, where wide-moat competitor Kone has the highest exposure. We are maintaining our fair value estimate and wide moat rating for Otis.

Otis is the largest elevator original equipment manufacturer (OEM) by revenue globally and also boasts the highest operating profit margins of the three publicly listed elevator OEMs, including Kone and Schindler. It has longer-term opportunities to grow its lucrative service business. However, along with its peers, it faces a near-term slowdown in the Chinese new equipment market, which we estimate contributes just over 10% of the company's operating profits. China's property developer sector, which carries high levels of debt, will likely go through a multi-month restructuring process before normal development activity resumes. A proportionately larger revenue share from service (maintenance and spare sparts) relative to competitors underpins the company's superior profitability. Close to 60% of the company's profits come from service, which delivers profit margins as much as 3 times that of new equipment and replacement ("modernization") unit EBIT margins.

Otis reported a solid third quarter with organic revenue up 8% and adjusted EBIT margin up 20 basis points year over year, while management increased full-year 2021 guidance. The shares however, were down 4% after management echoed peer Schindler’s view that the Chinese elevator market was likely to go through a period of short-term demand slowdown with a potentially flat or worse market in 2022, due to tightening government controls on expanding credit to the property sector. We estimate about 13% of the company’s profits come from the new installation market in China, also a feeder for its long-term service profits. The government will eventually loosen credit; however, we think there is more uncertainty in long-term underlying demand due to signs of speculative investments underpinning some of the recent robust growth, as well as a more mature urbanization rate than in previous market recoveries. We expect to make changes to our forecasts but shouldn't significantly impact our fair value estimate. Our wide moat rating remains intact.

The Chinese property sector is under pressure from the latest weakening land and building sales, government-directed tightened credit, and heavily indebted large developers, presenting risks to our valuations of elevator original equipment manufacturers, or OEMs, Kone, Schindler and Otis. Should Chinese new elevator equipment demand decrease by 10%-20%, we estimate 7%-18% downside risk to our current fair value estimates, or FVEs, for these three companies. China's property sector is a key driver of sector growth, accounting for around 60% of new elevator equipment demand. In the last decade, underlying demand has been supported by relatively low urbanization rates. However, China's urbanization rate is now 61%, from 51% in 2012, boosted by years of property sector growth and a narrowing gap with more mature markets.