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Here's Why Investors Should Retain OTIS Stock for Now
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Despite witnessing higher costs and expenses as well as lower contributions from its New Equipment unit, Otis Worldwide Corporation (OTIS - Free Report) is generating higher profits and margin expansion. The company is benefiting from solid contributions from its Services segment.
Also, this leading elevator and escalator manufacturing company is mainly focusing on innovation and restructuring strategies, as well as increasing investments in research and development ("R&D").
In the past month, OTIS’ stock gained 2.5%, outperforming the Zacks Building Products - Miscellaneous industry’s 1.8% growth. In the same period, the Zacks Construction sector and S&P 500 Index grew 4.2% and 2.3%, respectively.
Image Source: Zacks Investment Research
Notably, the company has a solid earnings surprise history. Its earnings per share (EPS) surpassed the Zacks Consensus Estimates in the trailing 18 quarters. For 2024, the Zacks Consensus Estimate for EPS reflects growth of 9.6% from the 2023 level on 1.5% higher revenues.
A Quick Glance at Q2 Results & Outlook
Recently, this Zacks Rank #3 (Hold) company reported its second-quarter 20204 results, where its adjusted EPS surpassed the consensus estimate by 2.9% and increased 15.2% from the year-ago period. The upside was mainly driven by a solid operational performance and effective tax rate improvement.
However, net sales missed the consensus mark by 3.5% and declined 3.2% year over year, as organic sales fell 1.2% and currency headwinds impacted sales by 2.1%. New Equipment sales were reduced due to a low single-digit sales decline in EMEA and a double-digit decline in China.
Nonetheless, the Service segment was strong, owing to the strength in maintenance and repair, and modernization. Impressively, the continuous strength of its modernization strategy has led to an order growth rate of more than 10% for eight consecutive quarters and mid-teens growth in backlog.
Although Otis has lowered its 2024 net sales guidance to $14.3-$14.5 billion from $14.5-$14.8 billion, it has raised the lower range of adjusted EPS outlook by 2 cents to $3.85-$3.90. The updated outlook indicates 9-10% year-over-year growth.
Let’s discuss the major contributing factors in detail.
Strong Services Business: OTIS observes continued strength in maintenance and repair operations. During the first half of 2024, the Service unit’s net sales rose 5.8% year over year. It reported a 5.4% year-over-year increase in maintenance and repair. Modernization grew 7.7% in the same period.
In the first half of 2024, modernization orders were up 13.4% at constant currency, thereby giving a boost to the backlog. Modernization backlog at constant currency increased 15% in the first quarter and 17% in the second quarter of 2024. The robust performance of the Service business was bolstered by the implementation of a modernization strategy, productivity initiatives and the UpLift program.
Innovation & Margin Driving Strategies: Otis’ primary focus on innovation is core to its strategy. The company maintained its research and development (R&D) investment in 2023 as well, investing $144 million and 1% of net sales.
The company’s Gen3 and Gen360 digital elevators, successors to the Gen2 family of elevator platforms, enhance the space-saving, energy-efficient design with the connectivity of the Otis ONE IoT (Internet of Things) digital service platform. Recently, Otis’ Thailand subsidiary has disclosed its Gen3-connected elevator platform in Bangkok.
This apart, Otis announced UpLift restructuring actions in July last year to transform its operating model. The company expects UpLift to generate approximately $175 million in annual savings by mid-2025. In the second quarter, the company’s adjusted SG&A, as a percent of net sales, improved 30 bps year over year owing to its focus on cost control and the ramp of UpLift initiatives.
The company expanded its total operating margins by 110 bps and increased adjusted earnings by 15% year over year. For 2024, adjusted operating profit is anticipated to be in the range of $2.40-$2.45 billion, up $160-$190 million at constant currency.
Stable Balance Sheet: Otis has been maintaining a strong liquidity position to navigate through the current environment. At the second-quarter end, the company had $942 million in cash and cash equivalents and a $1.5-billion unsecured, unsubordinated five-year revolving credit facility, maturing Mar 10, 2028. As of Jun 30, 2024, its long-term debt totaled $5.52 billion, down from $6.87 billion at 2023-end. The company has sufficient liquidity level to meet its short-term obligations of $1.66 billion.
Hurdles to Cross
Tepid New Equipment Business: The company’s New Equipment segment is dealing with lower contributions from the Americas and China. In the first half of 2024, New Equipment orders declined 10.9% year over year due to a 20.3% fall in the Americas owing to elevated interest rates and a 14.5% decline in Asia due to economic softness in China. The trend is likely to remain the same for the rest of 2024.
High Costs & Currency Woes: Otis has been incurring certain restructuring costs post the announcement of UpLift. The company has incurred total UpLift costs of $75 million till second-quarter 2024, including $32 million of restructuring costs and $43 million of transformation costs. Also, it is exposed to fluctuations in foreign currency exchange rates. In first-half 2024, foreign exchange reduced net sales by 1.7% year over year.
Moreover, the company’s business needs extensive R&D and hence involves costs. In the first half of 2024, R&D costs were 1.1% of total net sales.
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WMS has seen an upward estimate revision of 0.1% for fiscal 2025 earnings over the past 60 days to $7.18 per share. The company’s earnings surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average surprise being 23.2%.
Armstrong World Industries: Based in Lancaster, PA, Armstrong World is a leading global manufacturer of ceiling systems primarily for commercial, institutional, and residential building construction and renovation.
AWI has seen an upward estimate revision of 3.1% for 2024 earnings over the past 30 days to $6.07 per share. The company’s earnings for 2024 are expected to increase 14.1%. The company’s earnings surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average surprise being 15.4%.
Construction Partners: Headquartered in Dothan, AL, this civil infrastructure company engages in the construction and maintenance of roadways across Alabama, Florida, Georgia, North Carolina and South Carolina.
ROAD surpassed earnings estimates in three of the trailing four quarters and missed on one occasion, with the average surprise being 10.6%. ROAD has seen an upward estimate revision of 2.9% for fiscal 2024 earnings over the past 30 days to $1.44 per share.
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Here's Why Investors Should Retain OTIS Stock for Now
Despite witnessing higher costs and expenses as well as lower contributions from its New Equipment unit, Otis Worldwide Corporation (OTIS - Free Report) is generating higher profits and margin expansion. The company is benefiting from solid contributions from its Services segment.
Also, this leading elevator and escalator manufacturing company is mainly focusing on innovation and restructuring strategies, as well as increasing investments in research and development ("R&D").
In the past month, OTIS’ stock gained 2.5%, outperforming the Zacks Building Products - Miscellaneous industry’s 1.8% growth. In the same period, the Zacks Construction sector and S&P 500 Index grew 4.2% and 2.3%, respectively.
Image Source: Zacks Investment Research
Notably, the company has a solid earnings surprise history. Its earnings per share (EPS) surpassed the Zacks Consensus Estimates in the trailing 18 quarters. For 2024, the Zacks Consensus Estimate for EPS reflects growth of 9.6% from the 2023 level on 1.5% higher revenues.
A Quick Glance at Q2 Results & Outlook
Recently, this Zacks Rank #3 (Hold) company reported its second-quarter 20204 results, where its adjusted EPS surpassed the consensus estimate by 2.9% and increased 15.2% from the year-ago period. The upside was mainly driven by a solid operational performance and effective tax rate improvement.
However, net sales missed the consensus mark by 3.5% and declined 3.2% year over year, as organic sales fell 1.2% and currency headwinds impacted sales by 2.1%. New Equipment sales were reduced due to a low single-digit sales decline in EMEA and a double-digit decline in China.
Nonetheless, the Service segment was strong, owing to the strength in maintenance and repair, and modernization. Impressively, the continuous strength of its modernization strategy has led to an order growth rate of more than 10% for eight consecutive quarters and mid-teens growth in backlog.
Although Otis has lowered its 2024 net sales guidance to $14.3-$14.5 billion from $14.5-$14.8 billion, it has raised the lower range of adjusted EPS outlook by 2 cents to $3.85-$3.90. The updated outlook indicates 9-10% year-over-year growth.
Let’s discuss the major contributing factors in detail.
Strong Services Business: OTIS observes continued strength in maintenance and repair operations. During the first half of 2024, the Service unit’s net sales rose 5.8% year over year. It reported a 5.4% year-over-year increase in maintenance and repair. Modernization grew 7.7% in the same period.
In the first half of 2024, modernization orders were up 13.4% at constant currency, thereby giving a boost to the backlog. Modernization backlog at constant currency increased 15% in the first quarter and 17% in the second quarter of 2024. The robust performance of the Service business was bolstered by the implementation of a modernization strategy, productivity initiatives and the UpLift program.
Innovation & Margin Driving Strategies: Otis’ primary focus on innovation is core to its strategy. The company maintained its research and development (R&D) investment in 2023 as well, investing $144 million and 1% of net sales.
The company’s Gen3 and Gen360 digital elevators, successors to the Gen2 family of elevator platforms, enhance the space-saving, energy-efficient design with the connectivity of the Otis ONE IoT (Internet of Things) digital service platform. Recently, Otis’ Thailand subsidiary has disclosed its Gen3-connected elevator platform in Bangkok.
This apart, Otis announced UpLift restructuring actions in July last year to transform its operating model. The company expects UpLift to generate approximately $175 million in annual savings by mid-2025. In the second quarter, the company’s adjusted SG&A, as a percent of net sales, improved 30 bps year over year owing to its focus on cost control and the ramp of UpLift initiatives.
The company expanded its total operating margins by 110 bps and increased adjusted earnings by 15% year over year. For 2024, adjusted operating profit is anticipated to be in the range of $2.40-$2.45 billion, up $160-$190 million at constant currency.
Stable Balance Sheet: Otis has been maintaining a strong liquidity position to navigate through the current environment. At the second-quarter end, the company had $942 million in cash and cash equivalents and a $1.5-billion unsecured, unsubordinated five-year revolving credit facility, maturing Mar 10, 2028. As of Jun 30, 2024, its long-term debt totaled $5.52 billion, down from $6.87 billion at 2023-end. The company has sufficient liquidity level to meet its short-term obligations of $1.66 billion.
Hurdles to Cross
Tepid New Equipment Business: The company’s New Equipment segment is dealing with lower contributions from the Americas and China. In the first half of 2024, New Equipment orders declined 10.9% year over year due to a 20.3% fall in the Americas owing to elevated interest rates and a 14.5% decline in Asia due to economic softness in China. The trend is likely to remain the same for the rest of 2024.
High Costs & Currency Woes: Otis has been incurring certain restructuring costs post the announcement of UpLift. The company has incurred total UpLift costs of $75 million till second-quarter 2024, including $32 million of restructuring costs and $43 million of transformation costs. Also, it is exposed to fluctuations in foreign currency exchange rates. In first-half 2024, foreign exchange reduced net sales by 1.7% year over year.
Moreover, the company’s business needs extensive R&D and hence involves costs. In the first half of 2024, R&D costs were 1.1% of total net sales.
Key Picks
Some better-ranked stocks in the same space are Advanced Drainage Systems, Inc. (WMS - Free Report) , Armstrong World Industries, Inc. (AWI - Free Report) and Construction Partners, Inc. (ROAD - Free Report) . Each stock presently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.
Advanced Drainage Systems: Headquartered in Hilliard, OH, this company provides innovative water management solutions in stormwater and on-site septic wastewater industries.
WMS has seen an upward estimate revision of 0.1% for fiscal 2025 earnings over the past 60 days to $7.18 per share. The company’s earnings surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average surprise being 23.2%.
Armstrong World Industries: Based in Lancaster, PA, Armstrong World is a leading global manufacturer of ceiling systems primarily for commercial, institutional, and residential building construction and renovation.
AWI has seen an upward estimate revision of 3.1% for 2024 earnings over the past 30 days to $6.07 per share. The company’s earnings for 2024 are expected to increase 14.1%. The company’s earnings surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average surprise being 15.4%.
Construction Partners: Headquartered in Dothan, AL, this civil infrastructure company engages in the construction and maintenance of roadways across Alabama, Florida, Georgia, North Carolina and South Carolina.
ROAD surpassed earnings estimates in three of the trailing four quarters and missed on one occasion, with the average surprise being 10.6%. ROAD has seen an upward estimate revision of 2.9% for fiscal 2024 earnings over the past 30 days to $1.44 per share.