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Otis (OTIS) Up 6.5% in Past 6 Months Amid FX Woes: Here's Why
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Despite projecting slower sales and earnings in 2022, Otis Worldwide Corporation (OTIS - Free Report) stock gained 6.5% in the past six months, strongly outperforming the Zacks Building Products - Miscellaneous industry’s 3.9% fall. The company has been focusing on innovation and investments in research and development ("R&D"). OTIS’ solid first-half earnings and order performance is a testament to this fact.
The company delivered 1.6% organic growth in first-half 2022 and registered 10.2% growth in adjusted earnings per share. The upside was backed by a 30 basis points expansion of operating margin, a reduction in share count, a lower effective tax rate and the Zardoya transaction. Its long-term strategy and innovative solutions and services to customers also bode well.
Although significant currency headwinds, extensive research and development expenses and input cost pressures are putting pressure on OTIS’ top line, solid order and backlog numbers are providing visibility. New Equipment orders were up 8.8% in the first quarter and 16.5% in the second quarter, at constant currency. Segment backlog also increased 4% at the first quarter-end and 6% at the second quarter-end from the respective prior year, with growth across the regions.
Image Source: Zacks Investment Research
Let’s delve deeper into the factors boosting this leading elevator and escalator manufacturer’s growth trajectory.
Digital Innovation, a Boon: OTIS’ emphasis on innovation is core to its strategy. In 2021, it invested $159 million or 1.1% of net sales in R&D after investing $152 million in 2020. Otis also invested about $59 million in digital and strategic initiatives in 2021. The company maintained its R&D investment in the first and the second quarter as well, particularly in product innovation with its Gen3 offering.
Otis connects global R&D efforts through an operating model that sets global and local priorities based on customer and segment needs. In 2021, it launched the successors to the Gen2 family of elevators: the Gen3 and Gen360 digital elevator platforms. These platforms enhance the space-saving, energy-efficient design of the Gen2 elevator with the connectivity of the Otis ONE IoT (Internet of things) digital service platform.
In 2022, it expects to continue innovating and expanding the digital ecosystem and suite of digital solutions for both the existing service portfolio customers and new equipment shipments from factories.
Solid Buyout Strategy: Otis has been strategically expanding its business reach to international markets through joint ventures and non-wholly owned subsidiaries. The company operates in China through two joint ventures, namely, Otis Elevator (China) Investment Company Limited (“Otis China”) and Otis Electric Elevator Company Limited (“Otis Electric”).
Zardoya Otis S.A. in Spain manufactures, installs and services elevators and elevator equipment as well as exports elevator equipment for installation by certain other subsidiaries outside the country. In Sep 2021, the company announced a tender offer to acquire all of the issued and outstanding shares of Zardoya Otis, not owned by Otis. The company successfully delisted Zardoya Otis in early May.
In the first six months, it invested $28 million in businesses and intangibles assets, net of cash acquired.
Strong Liquidity Position: OTIS has been maintaining a strong liquidity position to navigate through the current challenging environment. The company ended the second quarter with $1.22 billion in cash and cash equivalents along with a $1.5-billion unsecured, unsubordinated five-year revolving credit facility. At June-end, its long-term debt totaled $6.6 billion, down from $7.25 billion at 2021-end. Also, it has no significant debt maturity until 2023.
Shareholders Friendly Move: The company is constantly enhancing its shareholders’ value through regular dividend increases and repurchases. It generated $326 million in free cash flow while continuing to return cash to shareholders. On Apr 24, the company announced a quarterly dividend hike of 20.8% to 29 cents per share. This represents 45% dividend growth since it has become a public company. Also, it announced a $1-billion share repurchase authorization in the first quarter. At the second quarter end, it repurchased a $400-million share from its common stock.
Some Better Ranked Stocks From Broader Construction Sector
EMCOR Group (EME - Free Report) , a Zacks Rank #2 company, has been benefiting from double-digit growth across the U.S. segments, resilient end markets, solid RPOs and bolt-on acquisitions.
The consensus mark for EME’s 2022 earnings rose to $7.73 per share from $7.66 in the past 30 days. This suggests 9.5% year-over-year growth.
United Rentals, Inc. (URI - Free Report) , a Zacks Rank #2 company, has been benefiting from a broad-based recovery of activity across end markets served. Also, higher margins from rental revenues and used equipment sales are added benefits.
The consensus mark for URI’s 2022 earnings rose to $31.03 per share from $29.43 in the past 30 days. This suggests 40.7% year-over-year growth.
UFP Industries, Inc. (UFPI - Free Report) , a Zacks Rank #2 company, has been benefiting from the diversity of markets, higher organic unit sales, solid contributions from buyouts, new product innovation and an improved pricing model.
The consensus mark for UFPI’s 2022 earnings rose to $10.56 per share from $9.15 in the past 30 days. This suggests 22.9% year-over-year growth.
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Otis (OTIS) Up 6.5% in Past 6 Months Amid FX Woes: Here's Why
Despite projecting slower sales and earnings in 2022, Otis Worldwide Corporation (OTIS - Free Report) stock gained 6.5% in the past six months, strongly outperforming the Zacks Building Products - Miscellaneous industry’s 3.9% fall. The company has been focusing on innovation and investments in research and development ("R&D"). OTIS’ solid first-half earnings and order performance is a testament to this fact.
The company delivered 1.6% organic growth in first-half 2022 and registered 10.2% growth in adjusted earnings per share. The upside was backed by a 30 basis points expansion of operating margin, a reduction in share count, a lower effective tax rate and the Zardoya transaction. Its long-term strategy and innovative solutions and services to customers also bode well.
Although significant currency headwinds, extensive research and development expenses and input cost pressures are putting pressure on OTIS’ top line, solid order and backlog numbers are providing visibility. New Equipment orders were up 8.8% in the first quarter and 16.5% in the second quarter, at constant currency. Segment backlog also increased 4% at the first quarter-end and 6% at the second quarter-end from the respective prior year, with growth across the regions.
Image Source: Zacks Investment Research
Let’s delve deeper into the factors boosting this leading elevator and escalator manufacturer’s growth trajectory.
Digital Innovation, a Boon: OTIS’ emphasis on innovation is core to its strategy. In 2021, it invested $159 million or 1.1% of net sales in R&D after investing $152 million in 2020. Otis also invested about $59 million in digital and strategic initiatives in 2021. The company maintained its R&D investment in the first and the second quarter as well, particularly in product innovation with its Gen3 offering.
Otis connects global R&D efforts through an operating model that sets global and local priorities based on customer and segment needs. In 2021, it launched the successors to the Gen2 family of elevators: the Gen3 and Gen360 digital elevator platforms. These platforms enhance the space-saving, energy-efficient design of the Gen2 elevator with the connectivity of the Otis ONE IoT (Internet of things) digital service platform.
In 2022, it expects to continue innovating and expanding the digital ecosystem and suite of digital solutions for both the existing service portfolio customers and new equipment shipments from factories.
Solid Buyout Strategy: Otis has been strategically expanding its business reach to international markets through joint ventures and non-wholly owned subsidiaries. The company operates in China through two joint ventures, namely, Otis Elevator (China) Investment Company Limited (“Otis China”) and Otis Electric Elevator Company Limited (“Otis Electric”).
Zardoya Otis S.A. in Spain manufactures, installs and services elevators and elevator equipment as well as exports elevator equipment for installation by certain other subsidiaries outside the country. In Sep 2021, the company announced a tender offer to acquire all of the issued and outstanding shares of Zardoya Otis, not owned by Otis. The company successfully delisted Zardoya Otis in early May.
In the first six months, it invested $28 million in businesses and intangibles assets, net of cash acquired.
Strong Liquidity Position: OTIS has been maintaining a strong liquidity position to navigate through the current challenging environment. The company ended the second quarter with $1.22 billion in cash and cash equivalents along with a $1.5-billion unsecured, unsubordinated five-year revolving credit facility. At June-end, its long-term debt totaled $6.6 billion, down from $7.25 billion at 2021-end. Also, it has no significant debt maturity until 2023.
Shareholders Friendly Move: The company is constantly enhancing its shareholders’ value through regular dividend increases and repurchases. It generated $326 million in free cash flow while continuing to return cash to shareholders. On Apr 24, the company announced a quarterly dividend hike of 20.8% to 29 cents per share. This represents 45% dividend growth since it has become a public company. Also, it announced a $1-billion share repurchase authorization in the first quarter. At the second quarter end, it repurchased a $400-million share from its common stock.
Zacks Rank
Currently, Otis carries a Zacks Rank #4 (Sell). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Some Better Ranked Stocks From Broader Construction Sector
EMCOR Group (EME - Free Report) , a Zacks Rank #2 company, has been benefiting from double-digit growth across the U.S. segments, resilient end markets, solid RPOs and bolt-on acquisitions.
The consensus mark for EME’s 2022 earnings rose to $7.73 per share from $7.66 in the past 30 days. This suggests 9.5% year-over-year growth.
United Rentals, Inc. (URI - Free Report) , a Zacks Rank #2 company, has been benefiting from a broad-based recovery of activity across end markets served. Also, higher margins from rental revenues and used equipment sales are added benefits.
The consensus mark for URI’s 2022 earnings rose to $31.03 per share from $29.43 in the past 30 days. This suggests 40.7% year-over-year growth.
UFP Industries, Inc. (UFPI - Free Report) , a Zacks Rank #2 company, has been benefiting from the diversity of markets, higher organic unit sales, solid contributions from buyouts, new product innovation and an improved pricing model.
The consensus mark for UFPI’s 2022 earnings rose to $10.56 per share from $9.15 in the past 30 days. This suggests 22.9% year-over-year growth.