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Otis Worldwide: Boring can be good.

Opdateret: 4. feb.

Most people may not find the elevator and escalator business very exciting. And with a looming recession, people may also stay away from any company that is involved in construction. However, it may be a mistake as Otis Worldwide provides recurrent revenue, which is one of the reasons that Terry Smith from Fundsmith recently added Otis Worldwide to his portfolio. In this analysis, I will investigate if Otis Worldwide should be added to my portfolio as well.

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.

This analysis will be a bit different from what you are used to read in my blog. Otis Worldwide did their IPO in April 2020, meaning I don't have access to the historical numbers dating back longer than that. I will still calculate a buy price using the principles I have learned from my Phil Town workshop as Otis Worldwide is not considered a growth company. Since I cannot find the historical numbers, I will combine the principles from the Phil Town workshop, with the principles I have learned from the GOAT academy. Hence, this analysis will be a bit different than my other analyses. I should also mention that most of the numbers I use in this analysis is from Finbox, which I believe is a great tool to easily get the numbers you need from various companies.

Before I start with the analysis, I should mention that I do not currently own shares in Otis Worldwide. However, I do own shares in one of their competitors Kone Oyj, which is a small position (0,64 % of the portfolio). If you would like to see or copy my portfolio, you can read how to access it here. As always, I will keep this analysis unbiased despite owning shares in of their competitors.

Otis Worldwide is the world's leading elevator and escalator manufacturing, installation and service company, and service customers in over 200 countries in the world. Otis Worldwide was founded in 1853. It was since acquired by United Technologies in 1976, and was spun off in 2020, where it did its IPO. They operate in two different segments: New Equipment and Service. The New Equipment segment is where Otis Worldwide design, manufacture, sell, and install elevators, escalators, and moving walkways. The Service segment is where Otis Worldwide do maintenance and repair services as well as modernization services to upgrade elevators and escalators, both on their own equipment but also on equipment from other companies. In 2022, New Equipment contributed with 43 % of net sales, while Service contributed with 57 % of net sales. However, looking at operating profit, New Equipment contributed with 17 %, while Service contributed with 83 %. Hence, Service is by far the most profitable segment. Otis Worldwide is the largest company in the business, and have existed for 169 years, I think it is safe to say that Otis Worldwide has a brand moat that its customers trust.

Their CEO 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 in IBM, Lockheed Martin, and Siemens AG. She has a degree in electric engineering from Lehigh University. She wants to grow Otis Worldwide 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 reinventing and disrupting Otis Worldwide is by using new technologies, such as artificial intelligence, automation, and robotics that can be used for high-volume repetitive tasks, which is something that Judy Marks has talked about. As a leader, she believes that culture makes a difference in any enterprise, which is culture is a big part of how she wants to lead, in which empowerment and respect are important features. In an interview she mentioned that you cannot have a successful business if you don't have satisfied customers and engaged colleagues, it doesn't matter the size and scale of the business. According to comparably, she has an employee rating of 76/100, which places her in top 15 % of similar sized companies. It is still early to judge Judy Marks as a CEO, but I personally like that she wants to reinvent and disrupt the company, while also stressing that satisfied customers and engaged employees are important.

I believe that Otis Worldwide has a brand moat. I feel confident in management, but there are still some uncertainties due to the short time since the IPO. Later I will do some calculations on a buy price for Otis Worldwide but before I do so, let us just have a look at some key financial metrics.

Down below we see some key financial metrics for Otis Worldwide over the last three years. The numbers are from Finbox, which is great tool for finding the financials for different companies. Revenue came in slightly lower in 2022 compared to 2021. However, I don't believe it is something to be worried about as 2022 has been a year full of macro challenges and according to management, they still have a high backlog, and it takes a while to convert that into revenue. 2022 was also affected by an unusual high US dollar, which affects the financial results of Otis Worldwide. The gross profit margin also came in slightly lower than in 2021, while the operating margin came in slightly higher in 2022 than in 2021, which resulted in EPS being higher in 2022 compared to 2021. EBITDA and EBIT came in slightly lower in 2022 than in 2021. I'm not overly concerned about some of the numbers decreasing in 2022 compared to 2021, as 2022 has been a more challenging year. In their outlook for 2023 management expects that Service net sales will grow more than New Equipment net sales, which should lead to higher margins and higher profitability moving forward.

Before we continue to the calculations, I would like to investigate the risks and potential of Otis Worldwide. One risk is macroeconomics. In their annual report, Otis Worldwide mentions that their business, operating results, and cash flows could be affected by changes in the global economic conditions. As we a looking into a recession, it could hurt the New Equipment segment, as we may see less construction in the near future. Furthermore, higher commodity prices, prices on raw materials and energy costs will also affect the results. Otis Worldwide employs 70.000 people worldwide, so wage inflation could affect results as well. Exchange rates. While exchange rates are something that could be grouped with macroeconomics, I think it should be mentioned as a standalone risk. Otis Worldwide has approximately 74 % of their sales outside of the United States. Hence, a strong dollar will affect the results of Otis Worldwide. In their latest earnings call, management mentioned that they had a $50 million foreign exchange headwind in operating profit, the foreign exchange headwind also affected EPS by -0,08 % in the quarter. Management also mentioned that foreign exchange translation continues to weigh on cash flow generation as long as the dollar stays strong. Competition. In their annual report, competition is mentioned as a risk as well. It is because the industry is global and highly competitive. You may only have three large companies in Otis Worldwide, Kone Oyj, and Schindler Holding, but there plenty of smaller operators as well. Otis Worldwide mentions that here are hundreds of participants that offers new equipment, but there are several thousand participants that offers service. And as we saw earlier, Service is by far their highest margin segment.

There are also potential for Otis Worldwide moving forward. The service segment is growing. The service organic sales have been growing for seven consecutive quarters. Otis Worldwide has also managed to grow margins despite the macroeconomic headwinds and has improved their margins for eleven consecutive quarters. Hence, Otis Worldwide is growing their highest margin segment, and growing their margins in their highest margin segment. It something that is fantastic for shareholders and could qualify Otis Worldwide as a compounder to buy and hold, if this continues. Urbanization. Management mentioned that as urbanization continues, the demand of their products and services has never been greater. According to The World Bank, the trend of urbanization will continue moving forward. The World Bank expects that the urban population will more than double from its current size by 2050, at which point nearly 7 out of 10 people will live in cities It means that most cities will need to build higher, which means that the need for elevators (and escalators) will continue to increase, and these new elevators will need service too. Shareholder friendly. Otis Worldwide is a shareholder friendly company. In the beginning of 2022, Otis Worldwide announced a $300 to $500 million share repurchase program. They later increased their share repurchase program to $700 million and has now further increased it to $850 million by the end of the year. Furthermore, they also increased their dividend by 20 %. In 2023, management expects to repurchase between $600 million to $800 million in shares, while they declared to pay a $0,29 quarterly dividend in line with previous.

All right, we have gone through the numbers, potential and risk regarding Otis Worldwide, and now it is time for us to calculate a price for Otis Worldwide. To calculate price, we will need the numbers that I have explained in the "MY STRATEGY" section of the website, as I do not want to go through the whole calculation here. I chose to use an EPS of 2,96 which is the one from 2022. I chose an Estimated future EPS growth rate of 10 (management expects to grow by +10 %), Estimated future PE 20 (which the double of the growth rate, as the historically PE for Otis Worldwide has been higher) and we already have the minimum acceptable return rate on 15 %. Doing the calculations by using the formula I described in "MY STRATEGY" we come up with the sticker price (some call it fair value or intrinsic value) of $37,96, and we want to have a margin of safety on 50 % so we will divide it by 2, meaning that we want to buy Otis Worldwide at price of $18,98 (or lower obviously), if we use the Margin of Safety price.

Our second way to calculate a buy price is the TEN CAP price, which is also explained at "MY STRATEGY". To do so, we need some numbers from their financial statements, keep in mind that all numbers are in millions. The operating cash flow last year was 1.560 The Capital Expenditures was 115. I tried to look through their annual report to see, how much of the capital expenditures were used on maintenance. I couldn't find it though, so as a rule of thumb, you expect 70 % of the capital expenditures to be used on maintenance, meaning we will use 80,5 in our further calculations. The Tax Provision was 519. We have 416,6 outstanding shares. Hence, the calculation will be like this: (1.560 - 80,5 + 519) / 416,6 x 10 = $47,97 in TEN CAP price.

The last calculation is the PAYBACK TIME. I also described in "MY STRATEGY". With the Free Cash Flow Per Share at 3,47 and a growth rate of 10 %, if you want your purchase back in 8 years, the PAYBACK TIME price is $43,65.

Having investigated Otis Worldwide, I find the company very interesting. I think they have a decent moat and I like how they are able to not only grow their high margin segment but also manage to increase the margins in that segment. There are some risks, especially short-term as the dollar continues to be strong, while there are also higher prices on commodities and raw materials. It is also difficult to judge management after so little time. Nonetheless, the long-term trends really seem to work in favor of Otis Worldwide, as urbanization will continue the demand for their products. I would love to add Otis Worldwide to my portfolio, and I don't think it is possible to buy it at a 50 % discount, but as Warren Buffett said: "Rather buy a wonderful company at a fair price than a fair company at a wonderful price". I will initiate a position below $65, as it gives more than a 32 % discount on the TEN CAP price, and more than 25 % discount on the PAYBACK TIME price.

My personal goal with investing is financial freedom. It also means that to obtain that, I do different things to build my wealth. If you have some extra hours to spare each month, you can turn a few hours a week into a substantial amount of money in a few years. If you are interested to know how I do it, you can read this post.

I hope that you enjoyed my analysis. Unfortunately, I cannot do a post of all the companies I analyze. I am available to copy but if you do your own trades, you can follow me on Twitter instead, as I tweet when I buy or sell anything.

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