By On October 8, shares of Otis Worldwide Corp (NYSE: OTIS) fell by 4% in early trading after Wolfe Research downgraded the stock from ‘outperform’ to ‘peer perform’.
The elevator and escalator manufacturer, which had gained approximately 16% year-to-date, faced investor apprehension following the analyst’s cautious outlook.
Concerns over China exposure
Wolfe Research expressed uncertainty about the effectiveness of recent stimulus measures in China, a market that likely contributes 14–15% of Otis’s estimated 2024 sales and around 10% of its earnings per share.
Given China’s significant role in the company’s performance, the potential stabilization of its real estate sector is crucial.
However, Wolfe Research suggested that it is challenging to predict how these measures will influence the market, and they continue to foresee pricing and margin pressures for Otis in 2025.
Otis stock: analysts adjust estimates
The downgrade comes as all six analysts covering Otis have revised their earnings estimates downward over the past 90 days.
For the upcoming third quarter, the consensus estimates project earnings per share of $0.91 on revenue of $3.58 billion, slightly higher than the $3.52 billion reported in the same quarter last year but matching the prior year’s EPS.
This cautious stance reflects ongoing concerns about global economic conditions and their impact on the company’s performance.
In the second quarter, Otis reported revenue of $3.6 billion, a 3.2% decrease year-over-year, missing analyst expectations by $130 million.
Despite this, the company achieved adjusted earnings per share of $1.06, surpassing estimates by $0.03 and marking a 15.2% increase from the previous year.
The service segment was a key contributor, with net sales increasing by 3% and organic sales growing by 5.1%.
Modernization orders rose by 14%, and the backlog expanded by 17% at constant currency, highlighting strong demand for upgrades and maintenance.
Strategic focus on recurring revenue streams
The service business, which provides maintenance and repair services, accounts for 62% of Otis’s revenue and 85% of operating profit in the first half of 2024. T
he maintenance portfolio grew by 4.2%, reflecting the company’s strategic emphasis on building recurring revenue streams.
Conversely, the new equipment segment faced challenges, with net sales declining by 11.4% due to decreased demand in China and the Americas, partially offset by growth in Asia-Pacific and EMEA regions.
Otis raised its full-year adjusted EPS guidance to between $3.85 and $3.90, up from the previous estimate, demonstrating confidence in its operational strategy.
The company expects organic service sales to increase by 6% to 7% while acknowledging a mid-single-digit decline in organic new equipment sales.
Management highlighted the success of the UpLift program, which aims to achieve $175 million in run-rate savings by mid-2025 through productivity improvements and cost efficiencies.
Otis stock: strong cash generation
The company’s robust free cash flow enables significant shareholder returns. In the second quarter, Otis generated an adjusted free cash flow of $353 million and executed $300 million in share repurchases.
For the full year, the company plans to repurchase approximately $1 billion in shares, up from $800 million in 2023.
Additionally, Otis increased its dividend by 14.7% in April, bringing the dividend yield to approximately 1.6%.
Since its spin-off in 2020, the dividend has grown by 95%, reflecting a compound annual growth rate of 18%.
While Otis has demonstrated resilience through its service-driven strategy and operational efficiencies, the next step in understanding its future lies in analyzing how market conditions and investor sentiment are shaping the stock’s trajectory.
Let’s take a closer look at what the charts suggest for Otis’s price movement going forward.
Otis stock: strong upward momentum remains
Otis’ shares have seen a strong rally since late October as they now trade near their all-time highs. The strong continues to display strong momentum across the long-term and medium-term charts.
Source: TradingView
Though today’s move has weakened it a bit on the short-term charts, it can be a temporary retracement.
Hence, short-term traders shouldn’t look at it as an opportunity to initiate a fresh short position.
A short position must only be considered if the stock falls below its recent swing low near $94.
Investors who are bullish on the company, but haven’t bought the stock yet, should buy it during retracements if it manages to come down to sub $96 levels.
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