Otis Worldwide is the global leader in elevator and escalator manufacturing, installation, and services, with a presence in over 200 countries. With a strong focus on high-margin service revenue and modernization, the company benefits from a vast installed base and long-term customer relationships. Otis’s ability to adapt to industry shifts and capitalize on urbanization trends has driven steady financial performance. The question remains: Should this elevator giant have a place in your portfolio?
This is not a financial advice. I am not a financial advisor and I only do these posts to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
Before I begin the analysis, I should mention that I do not currently own any shares in Otis Worldwide. However, I do own shares in one of their competitors, Kone Oyj, which represents a small position (2% of the portfolio). If you would like to view or copy my portfolio, you can find instructions on how to access it here. As always, I will keep this analysis unbiased despite owning shares in one of their competitors. If you want to purchase shares or fractional shares in Otis, you can do so through eToro. eToro is very user-friendly and easy to get started with. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $50.
The Business
Otis Worldwide is the global leader in elevator and escalator manufacturing, installation, and services, operating in over 200 countries. Founded in 1853, the company was acquired by United Technologies in 1976 and later spun off in 2020. It operates through two segments: New Equipment and Services. The New Equipment segment focuses on designing, manufacturing, selling, and installing passenger and freight elevators, escalators, and moving walkways for residential, commercial, and infrastructure projects. The Service segment provides maintenance, repairs, and modernization for both Otis equipment and third-party systems. In 2024, New Equipment contributed 38% of net sales and 13% of operating profit, while Services accounted for 62% of net sales and 87% of operating profit, making it the company's primary profit driver. Otis’s moat is built on its brand strength, extensive installed base, and deeply integrated customer relationships. With over 1.400 branches and a direct presence in more than 70 countries, the company has built long-standing relationships with real estate developers, general contractors, facility managers, and government agencies. Its installed base of approximately 2,4 million units under maintenance provides a significant advantage, as customers tend to remain with their original service provider due to reliability concerns, regulatory compliance, and the technical expertise required for proper maintenance. The complexity of switching providers, combined with Otis’s established reputation, creates high switching costs that protect its market position. Innovation further strengthens Otis’s differentiation. Its elevator platforms, such as Gen2, Gen3, and Gen360, incorporate advanced technology, IoT connectivity, and predictive maintenance capabilities to enhance performance and safety. The Otis ONE IoT platform allows for remote monitoring and diagnostics, reducing downtime and improving customer experience. Beyond elevators, Otis is also a leader in escalators and moving walkways. Otis’s service business is a key differentiator, supported by its global network of 36.000 service mechanics who ensure rapid response times and high-quality maintenance. Through the OTISLINE 24/7 customer support system, service requests are managed efficiently, enhancing reliability. The company expands its service portfolio by converting new installations into long-term maintenance contracts, leveraging its deep expertise and customer trust to maintain its leadership position. With long-term service agreements often spanning multiple years, Otis benefits from high customer retention and ongoing demand for modernization as buildings age. Its scale, reputation, and deeply embedded customer relationships make it difficult for competitors to displace, reinforcing its position as a leader in the elevator and escalator industry.
Management
The CEO of Otis Worldwide is Judy Marks. She first joined Otis Worldwide in 2017 and has been the CEO since the spinoff in 2020. Prior to joining Otis Worldwide, she held various positions at IBM, Lockheed Martin, and Siemens AG. She has a degree in electrical engineering from Lehigh University. She wants to grow Otis Worldwide by transforming and disrupting the company. As she says, "That's part of the culture of reinventing in a company that happens to be number one in our market now, but we can't rest." One way to reinvent and disrupt Otis Worldwide is by leveraging new technologies, such as artificial intelligence, automation, and robotics. These technologies can be utilized for high-volume repetitive tasks, a concept that Judy Marks has discussed. Under her leadership, Otis has embraced digital solutions, including the Otis ONE platform, which uses IoT and data analytics to enable predictive maintenance, improving service efficiency and reliability. As a leader, she believes that culture plays a crucial role in any organization. Culture is a significant aspect of her leadership style, emphasizing empowerment and respect as crucial elements. She has also placed a strong emphasis on diversity and inclusion, recognizing that diverse teams drive better performance and innovation. As the first woman to lead Otis, she has made inclusion a top priority, advocating for a workplace culture that fosters collaboration and new ideas. In an interview, she mentioned that you cannot have a successful business if you don't have satisfied customers and engaged colleagues, regardless of the size and scale of the business. According to Comparably, she has an employee rating of 76/100, which places her in the top 15% of similarly sized companies. Her leadership has been recognized across the industry, and she also serves on the boards of prominent organizations, including Caterpillar Inc. and AdvanceCT. I believe that Judy Marks is the right person to lead Otis due to her extensive experience and her desire to innovate and transform the company while also emphasizing the significance of contented customers and motivated employees.
The Numbers
The first metric we will investigate is the return on invested capital (ROIC). I would like a 10-year history demonstrating a minimum annual growth of 10%. Otis Worldwide made its IPO in 2020, so we only have five years of history. In the available data, Otis has delivered impressive results, with ROIC exceeding 60% in four of the five years and surpassing 70% in the past three years. The primary reason for Otis's high ROIC is its Service segment, which contributes 87% of operating profit despite accounting for only 62% of net sales. This segment benefits from long-term maintenance contracts, providing stable, recurring revenue with minimal capital investment. Servicing an existing elevator is far less costly than manufacturing new equipment, leading to strong profitability. As a result, Otis does not require significant ongoing capital expenditures compared to industrial manufacturers. Once elevators and escalators are installed, much of its revenue comes from servicing them, a business model that is far less capital-intensive than new equipment sales. These low capital requirements continue to support strong ROIC. Given this structure, there is no indication that Otis will not maintain its high ROIC in the future.
The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most significant of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. It is somewhat surprising that the numbers are negative in all years. However, there is a clear reason for this: Otis has reported negative equity since its IPO due to its strategy of utilizing debt to repurchase shares. This approach has enhanced shareholder returns and can be an effective strategy in a low-interest-rate environment. However, as interest rates rise, the benefits of this approach diminish. On a positive note, it is encouraging that equity has improved slightly over the past two years.
Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. It is not surprising that Otis Worldwide has consistently generated positive free cash flow in all five years for which data is available. Free cash flow has not returned to its 2021 highs, which was a particularly strong year for Otis in China. In 2024, free cash flow declined slightly, reaching its lowest level since 2020. However, Otis achieved its highest quarterly free cash flow since its IPO in the fourth quarter of 2024, suggesting that the company is on the right path to improving free cash flow. One reason for the lower free cash flow in 2024 was continued challenges in China, which also impacted the levered free cash flow margin, now at its lowest level since the IPO. Management has stated that they expect to continue allocating the majority of free cash flow toward buybacks and dividends, meaning investors should be rewarded as free cash flow grows. The free cash flow yield is currently below its five-year average since the IPO, indicating that shares are trading at a premium. However, we will revisit valuation later in the analysis.
Debt
Another important aspect to consider is the level of debt. It is crucial to determine whether a business has manageable debt that can be repaid within a three-year period. This is calculated by dividing total long-term debt by earnings. After analyzing Otis Worldwide's financials, I found that the company has 4,24 years' worth of earnings in debt. This is higher than I would like to see but is at its lowest level since the IPO. The relatively high debt is primarily due to Otis using debt to repurchase shares. I would prefer to see Otis prioritize debt reduction to bring it below the three-year threshold. Fortunately, management has stated that they are focused on reducing debt, and hopefully, we will continue to see progress year after year.
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Risks
Competition is a significant risk for Otis due to the fragmented nature of the industry, the presence of both large and small competitors, and the contract-based nature of the business. Several key factors contribute to the competitive pressure Otis faces. First, Otis operates in a highly competitive global industry with hundreds of participants in the New Equipment segment and several thousand competitors in the Service segment. While Otis competes globally with major players such as KONE, Schindler, and TK Elevator, the service business is particularly fragmented. Independent service providers collectively manage about 50% of service units, creating pricing and market share pressure, especially from smaller operators that specialize in local maintenance. Second, competitive dynamics vary by geography and segment. In some regions, local competitors may have an advantage due to regulatory requirements, established relationships, or pricing strategies tailored to specific markets. The Asia-Pacific region, in particular, has additional competitors beyond the global players, making it more challenging for Otis to capture and maintain market share. Third, the bidding process for contracts introduces financial risk. Otis must provide competitive pricing while accurately estimating costs, project timelines, and service requirements. Any miscalculation in a contract bid—whether in new installations or service agreements—could lead to reduced profitability, cost overruns, or penalties for failing to meet contract terms. Finally, while Otis benefits from its global brand, scale, and service infrastructure, smaller competitors can often undercut pricing, particularly in the service market. Independent service providers tend to focus on lower-end maintenance needs and may lack Otis’s full-service capabilities, but their lower cost structures make them appealing to certain customers. Since the service business is a key profit driver for Otis, the presence of low-cost competitors puts pressure on margins.
Regulations pose a significant risk for Otis due to the complexity of operating in multiple jurisdictions, the evolving nature of industry standards, and geopolitical uncertainties. Several key areas highlight why regulatory challenges could impact the company's operations and financial performance. First, Otis is subject to a wide range of industry-specific regulations, including building and elevator safety codes, labor laws, and licensing requirements. Since these regulations vary by country and region, compliance can be costly and require constant adaptation. Stricter safety standards or changes in certification processes could increase operational expenses and delay project timelines, affecting Otis’s ability to compete effectively. Second, environmental regulations impose additional costs and liabilities. Otis has incurred expenses related to environmental cleanup and expects to continue doing so under various government statutes. While these costs may not currently be material, more stringent regulations in the future - such as stricter emission controls in manufacturing or sustainability mandates - could increase compliance expenses and impact profitability. Third, international trade policies and restrictions create additional risks. Otis operates across many markets and is affected by trade barriers, export controls, tariffs, and foreign ownership regulations. Government-imposed policies such as import quotas, capital controls, or restrictive trade agreements could increase costs or limit Otis’s ability to expand in certain regions. Escalating trade tensions, particularly between the U.S. and China, could further disrupt supply chains and market access. Fourth, China represents a major market for Otis, accounting for one-fourth of global New Equipment net sales and over half of unit volume. Changes in Chinese regulations - such as new local manufacturing requirements or restrictions on foreign businesses - could limit Otis’s market access, increase compliance costs, or reduce demand. Additionally, if trade tensions between the U.S. and China escalate, Otis may face restrictions that could hinder sales growth.
Macroeconomic factors pose a risk for Otis because its business is closely tied to construction activity, infrastructure investment, raw material costs, and global economic conditions. Several key areas highlight why macroeconomic uncertainty can impact Otis’s financial performance and long-term growth prospects. First, demand for Otis’s new equipment is directly influenced by construction and infrastructure spending. Higher interest rates, economic downturns, and tighter credit conditions can make financing more expensive for real estate developers, leading to project delays or cancellations. Similarly, government spending on infrastructure plays a crucial role in funding large-scale projects, such as subway systems, airports, and public buildings. If governments cut back on infrastructure investments due to high deficits or shifting policy priorities, demand for Otis’s solutions could decline. Second, rising costs for raw materials, commodities, and labor put pressure on margins. The elevator and escalator industry depends on materials such as steel, copper, and aluminum, all of which are subject to price fluctuations. Inflationary pressures on wages and supply chain costs further add to operational expenses. If Otis is unable to pass these higher costs on to customers through pricing adjustments, profitability may decline. Third, foreign exchange rates and global trade policies impact Otis’s revenue and cost structure. As a multinational company operating in over 200 countries, Otis is exposed to currency fluctuations. A stronger U.S. dollar, for example, can reduce the value of international revenue when converted into dollars.
Reasons to invest
Otis’s Service segment is a compelling reason to invest in the company due to its recurring revenue model, industry leadership, and long-term growth potential. Several key factors highlight why this segment is a strong driver of profitability and stability. First, Otis benefits from a growing installed base of elevators and escalators, which directly supports the expansion of its Service portfolio. At the end of 2024, the global installed base reached approximately 22 million units, with expectations to grow to 23 million units by the end of 2025. Within this, Otis’s Maintenance portfolio stands at approximately 2,4 million units, reinforcing its position as the industry leader. Since elevators require regular servicing to ensure safety and regulatory compliance, Otis benefits from a highly predictable and recurring revenue stream. Second, the Service segment consistently delivers profit growth and margin expansion while remaining resilient through economic cycles. Since its spinoff, Otis has expanded its operating profit margin by 220 basis points, largely driven by the strength of its Service business. Third, Modernization presents a significant long-term opportunity as the global installed base ages. Approximately 8 million units are aging and in need of upgrades, creating a steady demand for refurbishment projects. While Modernization margins have traditionally been lower than Maintenance and Repair, they have now exceeded New Equipment margins and continue to improve. Fourth, Modernization also plays a crucial role in expanding the Service portfolio. There are two types of Modernization projects - on-portfolio and off-portfolio. On-portfolio projects involve existing Service customers, where Otis has an advantage due to its long-term relationships with building owners. Off-portfolio Modernization allows Otis to win new contracts by upgrading elevators and subsequently converting them into long-term Service agreements. While off-portfolio conversions have been a small contributor to Service growth so far, management expects this to increase significantly in the coming years, further strengthening recurring revenue.
China is a compelling reason to invest in Otis due to the country's large installed base of elevators and escalators, increasing demand for Modernization, and Otis’s strategic pivot toward its high-margin Service business. Several key factors support the investment case for Otis in China. First, China represents approximately 40% of the global installed base of elevators and escalators, making it the single largest market for Otis’s long-term Service and Modernization opportunities. While the Chinese construction boom has slowed, it has left behind an enormous base of installed units that require regular Maintenance, Repair, and, eventually, Modernization. With many elevators built 15 to 25 years ago now entering their prime upgrade cycle, demand for Modernization is expected to grow significantly. Second, Otis is shifting its China strategy from a reliance on New Equipment sales to a Service-driven model, which aligns with long-term profitability. Historically, the Chinese elevator market was driven by rapid urbanization and high-volume New Equipment sales, but that market has matured. Otis anticipated this structural change and is now focused on capturing lifetime value from existing customers through Maintenance and Modernization contracts, which generate higher margins than New Equipment sales. Third, Otis has demonstrated strong Service growth in China, with a targeted annual portfolio growth rate in the low teens and aggressive expansion in Modernization orders. By the end of 2024, Otis’s Service portfolio had more than double its size at the time of its spinoff. The company is leveraging its existing network to convert more New Equipment customers into long-term Service agreements while also recapturing maintenance contracts from competitors. Additionally, Otis is targeting more than 20% annual growth in Modernization orders, positioning it for sustained expansion in this segment. Fourth, China's competitive landscape in Service and Modernization is favorable to Otis. Unlike in mature markets where independent service providers (ISPs) control a significant share of maintenance contracts, ISPs in China have a minimal presence in Modernization due to the technical complexity of refurbishment projects. Unlike standard maintenance, Modernization requires replacing major components and specialized expertise, areas where Otis has a clear advantage. This reduces pricing pressure and allows Otis to capture a larger share of the high-margin Modernization business.
Urbanization is a compelling reason to invest in Otis, as the global shift toward city living continues to drive demand for elevators and escalators. Several key factors highlight how urbanization enhances Otis's growth prospects. According to The World Bank, urbanization is expected to accelerate, with the urban population more than doubling by 2050. By that time, nearly 70% of the world's population will live in cities. As urban areas become more densely populated, building taller structures becomes the only viable solution, making elevators and escalators essential for modern infrastructure. There are no alternatives to vertical transportation, ensuring a consistent need for Otis’s products. The elevator and escalator market is projected to grow steadily, with global demand expected to exceed $110.5 billion by 2028, up from $85.2 billion in 2023. This expansion is closely linked to urbanization, as cities continue to develop and modernize their infrastructure to accommodate increasing populations. Countries like India are experiencing rapid urbanization, leading to a surge in high-rise construction. India is now the second-largest market for elevators and escalators globally, with continued growth anticipated. Otis has been actively contributing to this development by providing vertical mobility solutions tailored to the specific needs of emerging urban centers. In summary, the global trend toward urban living makes elevators and escalators indispensable, directly driving demand for Otis’s products. The company’s strategic focus on high-growth urban markets positions it well for long-term expansion and profitability as cities continue to grow vertically.
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Valuation
Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators.
The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 4,07, which is from the year 2024. I have selected a projected future EPS growth rate of 8%. Finbox expects EPS to grow by 8,4% in the next five years. Additionally, I have selected a projected future P/E ratio of 16, which is double the growth rate. This decision is based on Otis Worldwide's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $34,75. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Otis Worldwide at a price of $17,38 (or lower, obviously) if we use the Margin of Safety price.
The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 1.382, and capital expenditures were 131. I attempted to analyze their annual report in order to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 92 in our calculations. The tax provision was 305. We have 397,6 outstanding shares. Hence, the calculation will be as follows: (1.382 – 92 + 305) / 397,6 x 10 = $40,11 in Ten Cap price.
The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With Otis Worldwide's free cash flow per share at $3,66 and a growth rate of 8%, if you want to recoup your investment in 8 years, the Payback Time price is $41,36.
Conclusion
After investigating Otis Worldwide, I find the company intriguing. I believe it has a solid competitive advantage, or "moat," and I have confidence in management. The company has consistently achieved a high ROIC, and while free cash flow reached its lowest level since 2020, I expect it to improve in the future, benefiting shareholders through buybacks and dividends. Competition is a risk for Otis due to the highly fragmented nature of the industry, with numerous global and local competitors in both the New Equipment and Service segments. While Otis benefits from its brand strength and scale, independent service providers control about 50% of service units, creating pricing pressure, while regional competitors and the contract-based bidding process present additional challenges to maintaining market share and profitability. Regulations also pose a risk due to the complexity of complying with varying industry standards, safety codes, and labor laws across multiple jurisdictions, which can increase costs and impact operations. Additionally, evolving environmental policies, trade restrictions, and regulatory changes - particularly in China, a key market for Otis - could limit market access, disrupt supply chains, and put pressure on profitability. Macroeconomic factors present another challenge, as Otis’s business is highly dependent on construction activity, infrastructure investment, and raw material costs, all of which are influenced by economic conditions. Higher interest rates, inflation, currency fluctuations, and government spending cuts could reduce demand for new equipment, increase operating costs, and pressure profitability. Despite these risks, Otis’s Service segment provides stable, high-margin recurring revenue driven by a growing installed base and increasing modernization demand. Its ability to convert upgrades into long-term service contracts strengthens profitability and market leadership. China is a key growth driver for Otis due to its large installed base of elevators, representing 40% of global units, and rising demand for modernization and service contracts as the market matures. Otis’s strategic shift from New Equipment sales to higher-margin Service and Modernization revenue positions it for long-term profitability. Urbanization further supports Otis’s growth, as the global shift toward city living necessitates taller buildings, making elevators and escalators essential. With the urban population expected to double by 2050, demand for Otis’s products will continue to rise. I believe Otis is a great company, and buying shares at $65 would provide a 20% discount to intrinsic value based on both the Ten Cap and Payback Time calculations, making it a strong long-term investment.
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