UpLift And China Transformation Will Drive Service Renewal

Key Takeaways

• Service-driven focus with growing maintenance and modernization efforts enhances profitability, countering regional new equipment sales volatility.
  
• Strategic initiatives and supply chain agility bolster earnings growth and operating profit resilience against external challenges.
  
• Dependence on the Service segment and challenges in China and tariffs may hinder revenue and margins, with risks from trade policies and market pressures.

Catalysts

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

• The projected multiyear growth cycle in modernization, driven by the aging of the global installed base, offers significant potential for revenue growth as approximately 8 million units are already in prime modernization age and are expected to increase steadily.
  
• The focus on the Service-driven business model, with continuous operating margin expansion, is anticipated to enhance net margins and earnings by leveraging efficiencies in maintenance and modernization offerings.
  
• The strategic emphasis on growing the maintenance portfolio and increasing modernization orders positions Otis well to expand revenue and sustain profitability, even as new equipment sales face regional volatility.
  
• Initiatives like the UpLift and China transformation program are expected to drive process efficiencies and sustainable earnings growth, contributing to operating profit margins through cost structure improvements.
  
• Otis's strategy to mitigate tariff impacts through supply chain adjustments and increased local sourcing is likely to protect operating profit, ensuring stronger earnings resilience amidst external trade challenges.

Otis Worldwide Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Otis Worldwide's revenue will grow by 4.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.8% today to 11.8% in 3 years time.
• Analysts expect earnings to reach $1.9 billion (and earnings per share of $5.02) by about May 2028, up from $1.5 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 24.1x on those 2028 earnings, down from 24.7x today. This future PE is greater than the current PE for the US Machinery industry at 21.6x.
• Analysts expect the number of shares outstanding to decline by 2.39% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.69%, as per the Simply Wall St company report.

Otis Worldwide Future Earnings Per Share Growth

Risks

• The decline in organic sales for New Equipment, particularly due to weakness in China and higher dependency on the Service segment, could impact revenue growth.
  
• The significant exposure to tariffs, especially from Chinese imports, could negatively affect operating profit margins due to increased costs that may not be fully mitigated.
  
• Persistent softness in repair growth within the Service segment may impact the overall growth rate and margin expansion for the business if execution does not accelerate as expected.
  
• Global trade policy uncertainties and project delays in the Americas pose risks to New Equipment sales forecasts, which could further affect revenue and earnings growth.
  
• Continued price pressure in the Chinese market, reflected in a 6% decline, could challenge profitability and margins despite cost-cutting efforts and strategic transformations.

Valuation

• The analysts have a consensus price target of $100.571 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 $134.0, and the most bearish reporting a price target of just $88.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $16.2 billion, earnings will come to $1.9 billion, and it would be trading on a PE ratio of 24.1x, assuming you use a discount rate of 7.7%.
• Given the current share price of $96.19, the analyst price target of $100.57 is 4.4% 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.