We came across a bullish thesis on Otis Worldwide Corporation (OTIS) on Brass Tacks Cap’s Substack by Brass Tacks Cap. In this article, we will summarize the bulls’ thesis on OTIS. OTIS Technologies, Inc.’s share was trading at $103.38 as of Sept 26th. OTIS’s trailing and forward P/E were 28.88 and 24.51 respectively according to Yahoo Finance.
A technician in a safety harness inspecting a passenger elevator in a modern office building.
Otis Worldwide Corporation founded in 1853 is a leading global company in the elevator and escalator industry operating in over 200 countries. The company has two main business areas: New Equipment, which handles the manufacturing and installation of elevators and escalators making 43% of sales which helps build long-term customer relationships and future service revenue. And the Service segment makes up 57% of sales contributing 78% of Otis’ operating profit due to its recurring revenue, high customer retention, and modernization opportunities. Otis’ large scale and strong market position make it hard for competitors to increase their market stake. Key strengths include a large installed base, global reach, strong brand, and advanced technology like the Otis ONE™ platform.
Otis Worldwide Corporation (OTIS) has a strong position in the elevator and escalator industry. Being the largest company in this field, Otis benefits from its large scale, which helps it operate efficiently and provide excellent service. This large scale also means Otis has a wide service network, making it easier to keep customers satisfied and loyal. Switching to another service provider is costly and disruptive for building owners, which keeps them with Otis. It has a long-standing reputation for safety and reliability, built over 170 years, which gives it an edge in a highly regulated industry. Its expertise in regulations and advanced technology, like smart elevators, sets it apart from smaller competitors. The company’s dense service network allows for quick technician response times, which is hard for rivals to match. Otis is well-positioned to benefit from urbanization, especially in fast-growing markets like China and India, where there’s a high demand for elevators.
Looking at its valuation side it trades about 26 times its free cash flow which seems plausible due to Otis having a return on invested capital (ROIC) of around 30%, which is higher than its cost of capital and paying out 35-40% of its net income as dividends and buying back shares to reward shareholders. The company boasts a global conversion rate of approximately 60% for new equipment installations into service contracts, with rates reaching up to 90% in developed markets complemented by an impressive customer retention rate of over 94% because of the high quality of Otis’s service. Additionally, the average contract length of 4-5 years provides visibility into future revenues. Otis also aims to expand its service portfolio from 2.2 million units to over 2.5 million by 2026, tapping into the modernization market. Furthermore, the company’s “Uplift” program is projected to deliver $150 million in annual savings by 2025. Overall, Otis looks like an interesting pick for those looking for quality and growth in a stable industry.
Otis Worldwide Corporation is also not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 33 hedge fund portfolios held OTIS at the end of the second quarter which was 34 in the previous quarter. While we acknowledge the risk and potential of OTIS as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than OTIS but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.