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Otis (OTIS) Up 19% in 3 Months: Will the Rally Continue?

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Otis Worldwide Corporation’s (OTIS - Free Report) shares have been riding high on the back of solid New Equipment and Service segments, strong business strategy as well as robust data and technology-based innovations. Also, creation of more value for its shareholders through dividend and share repurchase is encouraging.

Shares of Otis — the world's leading elevator and escalator manufacturing, installation and service company — have rallied 18.7% over the past three months, outperforming the industry’s 4.1% upside.

Moreover, earnings estimates have risen over the past few months, suggesting that sentiments on Otis are moving in the right direction. Over the past two months, the Zacks Consensus Estimate for 2021 earnings has been revised 4.8% upward. The upwardly revised earnings estimates imply 13.5% year-over-year growth. This signifies bullish analysts’ sentiments.

Zacks Investment ResearchImage Source: Zacks Investment Research

Here are a few factors that are driving this Zacks Rank #2 (Buy) company. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Robust First-Quarter 2021 Results

For the first quarter, the company’s earnings and revenues surpassed the Zacks Consensus Estimate by 16.1% and 8.8%, respectively. Also, the metrics grew 20% and 14.9%, respectively, on the back of 10.3% increase in organic sales. Organic sales were up in both New Equipment and Service segments. Also, solid adjusted operating margin (up 40 basis points [bps]) and benefits from a lower effective tax rate added to the positives, partially offset by interest expense.

New Equipment Business Aids

Through the New Equipment segment, Otis designs, manufactures, sells and installs a wide range of passenger and freight elevators, escalators as well as moving walkways in residential and commercial building along with other infrastructure projects.

For the first quarter, net sales in the segment grew 29.8% year over year, supported by 25.1% organic sales, 4.6% currency translation and 0.1% acquisitions. The uptrend was primarily driven by double-digit growth in Asia and Americas along with low-single-digit growth in EMEA.

Adjusted operating margin expanded 170 bps backed by higher volume and strong material productivity, partially offset by unfavorable mix and price. Orders were up 18.4% at constant currency. New equipment backlog increased 8% and 2% at constant currency year over year.

For 2021, it expects organic sales to be up 7.5-8.5%, driven by accelerated backlog conversion and continued market recovery. Operating margin is likely to be up 80 bps at midpoint from the prior year.

Solid Service Business

The Service segment performs maintenance and repair services for both its products and those of other manufacturers as well as provides modernization services to upgrade elevators and escalators. Modernization offerings can range from relatively simple upgrades of interior finishes and aesthetics to complex upgrades of larger components as well as sub-systems.

Its high-margin recurring service business drives approximately 80% of the profit. The global service market typically grows faster than the equipment market, with relatively consistent pricing. Moreover, its focus on Data and technology-based innovations help it attract customers.

For the first quarter, revenues improved 5.8% on 1.3% growth in organic sales. Organic maintenance and repair sales increased 1.5% and organic modernization sales grew 0.3% year over year. Adjusted operating margin expanded 60 bps from the prior year. The upside was driven by higher volume, strong contribution from productivity initiatives and favorable pricing.

For 2021, Service sales are likely to be up 2-4%, with maintenance and repair sales likely to increase 2-4%, and modernization sales to rise in low-to-mid single digits. The company expects maintenance to be resilient. It witnesses continued recovery in repair and modernization businesses.

Solid Business Model & Shareholder Value

Otis has been focusing on growing business on the back of various strategies like acquisitions, product innovations, new technology through continuous research and development as well as dividends and share repurchase.

In the first quarter, it invested $24 million in a number of immaterial acquisitions in the Service segment. Recently, it introduced Made to Move Communities, a program that focuses on two principal goals, advancing STEM education and supporting young innovators in the development of inclusive mobility solutions for underrepresented communities.

This apart, Otis — which shares space with Owens Corning (OC - Free Report) , Masco Corporation (MAS - Free Report) and PGT Innovations, Inc. (PGTI - Free Report) in the same industry — invested 1% of total net sales in research and development during the first quarter.

Notably, it values its investors and hence raised dividend by 20% to 24 cents as well as increased the share buyback target for 2021 to $500 million.

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