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Otis Worldwide: Boring can be good.

Opdateret: 30. okt.

Most people may not find the elevator and escalator industry very exciting. And with a looming recession, people may also stay away from any company involved in construction. However, it may be a mistake as Otis Worldwide provides recurring revenue, which is one of the reasons why Terry Smith from Fundsmith recently added Otis Worldwide to his portfolio. In this analysis, I will investigate whether 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 reading in my blog. Otis Worldwide conducted their IPO in April 2020, which means that I do not have access to historical data prior to that date. I will still calculate a buying 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 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 (0,64% 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. You can start with as little as $50. Click on the picture below to get started

Otis Worldwide is the world's leading elevator and escalator manufacturing, installation, and service company, serving customers in over 200 countries worldwide. Otis Worldwide was founded in 1853. It was acquired by United Technologies in 1976 and was later spun off in 2020, when it conducted its IPO. They operate in two different segments: New Equipment and Services. The New Equipment segment is where Otis Worldwide designs, manufactures, sells, and installs elevators, escalators, and moving walkways. The Service segment is where Otis Worldwide provides maintenance and repair services, as well as modernization services, to upgrade elevators and escalators. This includes their own equipment as well as equipment from other companies. In 2022, New Equipment contributed 43% of net sales, while Service contributed 57% of net sales. However, when examining operating profit, New Equipment contributed 17%, while Service contributed 83%. Hence, the service segment is by far the most profitable. Otis Worldwide is the largest company in the industry and has been in existence for 169 years. I think it is safe to say that Otis Worldwide has built a strong 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 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. As a leader, she believes that culture makes a difference in any enterprise. Cultureis a big part of how she wants to lead, with empowerment and respect being important features. 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. It is still too early to judge Judy Marks as a CEO, but I personally appreciate her desire to innovate and transform the company, while also emphasizing the significance of contentedcustomers and motivated employees..

I believe that Otis Worldwide has a strong brand moat. I feel confident in management, but there are still some uncertainties due to the short time since the IPO. Later, I will calculate the purchase price for Otis Worldwide. But before I do that, let's take a look at some key financial metrics.

Below, we present key financial metrics for Otis Worldwide over the past three years. The numbers are from Finbox, which is a great tool for finding the financials of different companies. Revenue came in slightly lower in 2022 comparedto 2021. However, I don't believe it is something to be worried about, as 2022 has been a year full of macro challenges. According to management, they still have a high backlog, and it takes a while to convert that into revenue. Additionally, 2022 was also affected by an unusually high US dollar, which impacted the financial results of Otis Worldwide. The gross profit margin also came in slightly lower in 2022 compared to 2021, while the operating margin came in slightly higher in 2022 than in 2021. As a result, the EPS (earnings per share) was higher in 2022 than in 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. This is anticipated to result in higher margins and increased profitability in the future.

Before we proceed with the calculations, I would like to assess 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 global economic conditions. As we are 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, raw material prices, and energy costs will also affect the results. Otis Worldwide employs 70.000 people globally, so wage inflation could also impact results. Exchange rates. While exchange rates are something that could be grouped with macroeconomics, I believe they should be discussed as a separate risk factor. Otis Worldwide has approximately 74% of its 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 experienced a $50 million foreign exchange headwind in operating profit. This foreign exchange headwind also had a negative impact on EPS, reducing it by 0,08% in the quarter. Management also mentioned that foreign exchange translation continues to impact cash flow generation as long as the dollar remains strong. Competition. In their annual report, competition is mentioned as a risk as well. The reason is that the industry is global and highly competitive. There may only be three large companies in Otis Worldwide, Kone Oyj, and Schindler Holding, but there are plenty of smaller operators as well. Otis Worldwide mentions that there are hundreds of participants that offer new equipment, but there are several thousand participants that offer services. And as we saw earlier, the Service segment is by far their highest margin segment.

There are also potential opportunities for Otis Worldwide moving forward. The service segment is growing. The organic sales of the service have been growing for seven consecutive quarters. Otis Worldwide has also managed to grow itsmargins despite the macroeconomic headwinds and has improved them for eleven consecutive quarters. Hence, Otis Worldwide is growing its highest margin segment and increasing its margins within that segment. It is 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 for their products and services has never been greater. According to The World Bank, the trend of urbanization will continue to move forward. The World Bank expects that the urban population will more than double from its current size by 2050. At that point, nearly 7 out of 10 people will live in cities. This means that most cities will need to construct taller buildings, resulting in an increased demand for elevators (and escalators). Consequently, these new elevators will also require maintenance and servicing. Shareholder-friendly. Otis Worldwide is a shareholder-friendly company. In the beginning of 2022, Otis Worldwide announced a share repurchase program worth $300 to $500 million. They later increased their share repurchase program to $700 million and have 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 and $800 million in shares, while also declaring a quarterly dividend of $0,29, which is consistent with previous dividends.

All right, we have gone through the numbers, potential, and risk regarding Microsoft, and now it is time for us to calculate a price for Microsoft. To calculate the price, we will need the numbers that I have explained in the "MY STRATEGY" section of the website. I don't want to go through the entire calculation here. I chose to use an EPS of 2,96 which is from 2022. I chose an estimated future EPS growth rate of 10% (management expects to grow by +10%), an estimated future PE of 20 (which is double the growth rate, as the historical PE for Otis Worldwide has been higher), and we already have the minimum acceptable return rate of 15%. Doing the calculations, we come up with the sticker price (some call it fair value or intrinsic value) of $37,96. 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 $18,98 (or lower, obviously)if we use the Margin of Safety price.

Our second method for calculating a purchase price is the Ten Cap price, which is also explained in "MY STRATEGY".To do so, we need some numbers from their financials. Keep in mind that all numbers are in millions. The operating cash flow last year was 1.560 The capital expenditures were 115. I tried to look through their annual report to see how much of the capital expenditures were used for maintenance. I couldn't find it, but as a rule of thumb, you canexpect 70% of the capital expenditures to be used for maintenance. This means that 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 as follows: (1.560 - 80,5 + 519) / 416,6 x 10 = $47,97 in Ten Cap price.

The final calculation is the Payback Time. I also described in "MY STRATEGY". With Otis Worldwide's Free Cash Flow Per Share at 3,47 and a growth rate of 10%, if you want to recoup your purchase in 8 years, the Payback Time price is $43,65.

Having investigated Otis Worldwide, I find the company to be very interesting. I believe they have a decent competitive advantage, or "moat," and I appreciate their ability to not only expand their high-profit segment but also improve the profit margins within that segment. There are some risks, especially in the short term, as the dollar continues to remain strong, leading to higher prices for commodities and raw materials. It is also difficult to judge management after such a short period of time. Nonetheless, the long-term trends really seem to work in favor of Otis Worldwide, as urbanization will continue to drive 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. However, as Warren Buffett said, "It is better to 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 offers a discount of more than 32% on the Ten Cap price and more than 25% on the Payback Time price.

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