INVESMENT THESIS
Our rating on Otis Worldwide Corp. (NYSE: OTIS) is BUY. We believe that Otis has the size and scale to compete effectively in global markets. Its large installed base of elevators, escalators and moving sidewalks provides predictable and growing service revenue while also lending stability to margins. Looking ahead, we expect low interest rates and continued urbanization in developing markets to drive long-term sales growth and margin expansion at Otis.
RECENT DEVELOPMENTS
OTIS shares have risen about 33% since they began trading on 4/3/20.
In the nine months ended September 30, the company earned $1.86 per share.
Otis has been impacted by the COVID-19 pandemic, and expects continued negative effects over the remainder of 2020. In particular, it expects results to be hurt by temporary closures or reduced capacity at Otis factories, customer liquidity constraints, delayed or canceled orders, and delays in maintenance services and the installation of new equipment.
Along with the 3Q20 earnings release, Otis updated its full-year outlook. Management expects 2020 net sales to decline 3%-4% on a GAAP basis (versus a prior outlook of down 4.5%-6.5%) and 2%-3% on an organic basis (versus a prior outlook of down 2%-4%). It projects adjusted EPS of $2.42.
EARNINGS & GROWTH ANALYSIS
Otis has two segments, New Equipment (43% of 2Q sales) and Services (57%). Recent trends and outlooks for these segments are discussed below.
In 3Q, New Equipment revenues declined 1% in constant currency. Organic sales declined in the low single digits in EMEA, and fell slightly in the Americas and Asia. Reflecting recovery from the pandemic, organic sales in China rose in the mid-single digits. New Equipment orders were up slightly in constant currency, with low single-digit growth in EMEA and Asia, partially offset by a low single-digit decline in the Americas. Looking ahead, we anticipate flat sales for the next two quarters.
Services revenue declined 1.4% year-over-year. Results in this segment benefited from favorable currency translation, productivity improvements, and cost-cutting. Looking ahead, we anticipate a low single-digit decline in sales over the next two quarters.
FINANCIAL STRENGTH & DIVIDEND
Long-term debt was $5.5 billion. The shareholders’ deficit was $4 billion, resulting in a negative debt-to-cap ratio.
The company is targeting free cash flow of $1.0-$1.1 billion in 2020, with conversion of 130%-140% of GAAP net income. In the nine months ended September 30, cash flow was $1.06 billion and the conversion ratio was 162%.
Otis pays a dividend.
MANAGEMENT & RISKS
Ms. Marks has varied industry and management experience, having worked at IBM (1984-1994), Loral (1994-1996), Lockheed Martin (1996-2011), and Siemens (2011-2017). She joined UTC as president of Otis in 2017.
The company’s competitive advantages include the relationships built over a 160-year-plus history, a strong balance sheet, technological leadership, and an installed base of more than two million units that provide a steady and high-margin source of Services revenue.
Investors in OTIS shares face risks. Otis has domestic and international operations that subject the company to changes in local and regional economic conditions, exchange rates, regulatory shifts, and political risks. Although Otis is the leader in its industry, it operates in a competitive environment in which rivals may introduce superior technology.
COMPANY DESCRIPTION
The company’s 69,000 employees operate from more than 1,400 branches and offices and include 40,000 field technicians. Otis elevators and escalators move more than two billion people daily. The company has more than two million maintenance units under contact and operates in 200 countries. Its two business segments are New Equipment and Services. The New Equipment unit designs, manufactures, sells and installs passenger and freight elevators, as well as escalators and moving sidewalks.
Source: Argus
