Expanding Horizons In India And Service Growth Propel Promising Market Transformation

Key Takeaways

• Expansion in India and strategic shift in China focus on services are expected to boost revenue and margin resilience.
  
• Uplift initiatives improve productivity and pricing, enhancing margins and earnings growth, despite a moderate decline in China’s market.
  
• Economic challenges in China and Europe could impact Otis' revenue and profitability, with potential risks from price pressure, market slowdown, and reliance on stimuli.

Catalysts

Engages in manufacturing, installation, and servicing of elevators and escalators in the United States, China, and internationally.

• Otis plans to expand its manufacturing facility in Bengaluru, enhancing capacity to meet growing demand in India's residential, commercial, and infrastructure sectors. This expansion is likely to boost future revenue through increased sales opportunities in a rapidly developing market.
  
• The company's focus on the service segment exhibits robust growth, with modernization orders up approximately 10% year-to-date and a modernization backlog increase of 12%, potentially leading to higher future earnings and margins as these projects are completed and billed.
  
• Otis's strategic shift in China from new equipment to service is yielding results, with a growing service portfolio offering potential for improved revenue stability and margin resilience despite market challenges in China.
  
• Continued execution of the company’s uplift initiatives is leading to increased productivity, favorable pricing, and reduction in annual wage inflation effects. These strategies are expected to enhance operating margins and, subsequently, net earnings growth over the coming quarters.
  
• The company anticipates global new equipment market stabilization and improvement, except for a moderate decline in China. The anticipated improvement in its overall markets could help drive revenue growth, while ongoing service expansion in maintenance and modernization should support strong earnings progression.

Otis Worldwide Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Otis Worldwide's revenue will grow by 3.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.5% today to 11.8% in 3 years time.
• Analysts expect earnings to reach $1.9 billion (and earnings per share of $4.83) by about November 2027, up from $1.6 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 25.8x on those 2027 earnings, up from 24.6x today. This future PE is greater than the current PE for the US Machinery industry at 24.6x.
• Analysts expect the number of shares outstanding to decline by 1.03% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.15%, as per the Simply Wall St company report.

Otis Worldwide Future Earnings Per Share Growth

Risks

• The decline in China new equipment market and significant price pressure could negatively impact Otis' overall revenue and operating profit margins, as new equipment sales have been a substantial revenue source.
  
• Continued economic softness in China and a slowdown in the market could pose a risk to both new equipment and service revenue growth, affecting overall profitability.
  
• The potential need for cost reductions in China due to market contraction may affect Otis' net margins, despite efforts to balance pricing and volume.
  
• The ongoing challenges in EMEA, specifically weakness in Western and Northern Europe, could hinder order performance and influence revenue growth prospects in those regions.
  
• Reliance on positive developments from anticipated China stimulus measures introduces uncertainty into future revenue streams, which may affect financial projections.

Valuation

• The analysts have a consensus price target of $101.54 for Otis Worldwide based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $120.0, and the most bearish reporting a price target of just $79.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $15.8 billion, earnings will come to $1.9 billion, and it would be trading on a PE ratio of 25.8x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of $100.39, the analyst's price target of $101.54 is 1.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.