Elevating Wide-Moat Otis as Our Elevator OEM Top Pick Following 30% Fair Value Estimate Boost

We’ve lifted our fair value estimate for Otis Worldwide OTIS 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.

We expect all major elevator OEMs to benefit from meaningful growth in elevator modernization earnings over the coming decade. We expect the global market for elevator modernization will grow at an average of 8% annually over the coming decade as the installed base in developed markets continues to age. Further, China—which boasts the largest installed base of elevators globally—will become an important source of elevator modernization growth in the latter part of the current decade.

Nonetheless, we have reduced our fair value estimate for Kone KNEBV by 14% to EUR 48 per share, having increased our cost of capital assumption to 7.5% from 7% to reflect the company’s lack of debt in its capital structure. Our CHF 210 fair value estimate for Schindler Holding SCHN is unchanged. We retain our wide economic moat and low uncertainty ratings for all three integrated OEMs and now assign a standard capital allocation rating to all of them as well.