Otis Worldwide Corporation OTIS is benefiting from its innovation investments, which are directly fostering the demand for its services globally, thus boosting its backlog. Furthermore, its strategic approach toward allocating its capital for rewarding shareholders, along with restructuring initiatives, are other noteworthy aspects.
Shares of this elevator and escalator manufacturing, installation and service company have lost 8.2% in the past month compared with the Zacks Building Products - Miscellaneous industry’s 10.7% decline and the Zacks Construction sector’s 10.4% decrease. On the other hand, during the same time frame, the S&P 500 Index inched up 1.3%. Headwinds in the form of increased costs and expenses, foreign exchange risks and other persisting macroeconomic uncertainties are marring OTIS’ prospects to some extent.
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The Zacks Consensus Estimate of the company’s 2025 earnings per share (EPS) has moved south from $4.23 to $4.19 in the past 60 days. However, the estimated value indicates 8.5% year-over-year growth. Also, the earnings estimates for the first quarter of 2025 reflect 12.5% growth from the year-ago figure. A mixed indication of the technical indicators is clouding the judgment of the investors regarding OTIS stock. Thus, it is suggested to wait for a more favorable entry point before considering any action regarding this stock.
Let us discuss the factors affecting this Zacks Rank #3 (Hold) stock.
Factors Favoring OTIS Stock
Focus on Innovation Draws Attention: One of the main focuses of Otis Worldwide remains on investing in innovation. It connects global R&D efforts through an operating model that sets global and local priorities based on customer and segment needs. Notably, its Gen3 and Gen360 digital elevators, successors to the Gen2 family of elevator platforms, are crafted to enhance the space-saving, energy-efficient design with the connectivity of the Otis ONE IoT (Internet of Things) digital service platform.
The company's recent contract win for installing seven Otis SkyRise and three Otis Arise elevators for the Chin Hin Group Property Dawn KLCC in Kuala Lumpur substantiates its approach toward continuous innovation. The installation tenure is expected to stretch till 2029. OTIS 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.
UpLift Restructuring Efforts: Otis Worldwide has been working diligently toward strategically implementing its UpLift restructuring actions to transform its operating model, since announcing it in July 2023. The restructuring efforts crafted include the standardization of its processes and improvement of supply-chain procurement, among other aspects of the program, as well as certain restructuring actions. The company expects UpLift to generate approximately $175 million in annual savings by mid-2025.
During the first nine months of 2024, OTIS’ adjusted selling, general and administrative (SG&A) expenses, as a percent of net sales, improved 20 bps year over year, driven by savings resulting from UpLift, cost containment actions and favorable foreign exchange impacts. This streamlined functional structure is yielding productivity benefits while allowing it to leverage its global scale to drive cost savings, especially with digital technology operations and other indirect spending.
Rewarding Shareholders: OTIS is constantly enhancing its shareholders’ value through regular dividend increases and repurchases. It generated $889 million in adjusted free cash flow in the first nine months of 2024 while continuing to return cash to shareholders, paying $450 million worth of dividends and repurchasing $800 million worth of shares. Notably, on April 23, 2024, the company announced a quarterly dividend hike of 14.7% to 39 cents per share.
The company aims to continue focusing on maintaining operational excellence and navigating macro headwinds while finishing up 2024 and moving into 2025.
What’s Hindering OTIS Stock’s Momentum?
Increased Costs: Elevators, escalators and related equipment need extensive research and development and hence involve costs. Again, inflation and higher costs of the inputs could dampen its overall results. Although the incremental cost of the technology is relatively low, real cost of installation is still growing. In the first nine months of 2024, OTIS’ R&D costs were 1.1% of total net sales compared with 1% in the year-ago period.
Furthermore, the company has been incurring certain restructuring costs post the announcement of the UpLift initiative. Since the announcement till third-quarter 2024, OTIS has incurred total costs of $97 million for UpLift, including $36 million of restructuring costs and $61 million of transformation costs.
Foreign Exchange Risks: Otis Worldwide is exposed to fluctuations in foreign currency exchange rates, owing to international sales, purchases, investments and other transactions. In the first nine months of 2024, foreign exchange reduced net sales by 1.4% year over year. In the New Equipment segment, foreign exchange reduced net sales by 1.5% from the year-ago period. In the Services segment, foreign exchange reduced net sales by 1.3% from the prior year. For 2024, it expects headwinds from foreign exchange translation to impact sales.
Key Picks
Here are some better-ranked stocks from the same sector space.
Sterling Infrastructure, Inc. STRL presently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
It has a trailing four-quarter earnings surprise of 21.5%, on average. Shares of STRL have gained 49.6% in the past six months. The Zacks Consensus Estimate for STRL’s 2025 sales and EPS implies an increase of 7.3% and 8.1%, respectively, from the prior-year levels.
EMCOR Group, Inc. EME currently sports a Zacks Rank of 1. EME delivered a trailing four-quarter earnings surprise of 32.3%, on average. The stock has gained 27.8% in the past six months.
The consensus estimate for EME’s 2025 sales and EPS indicates an increase of 6.6% and 7.2%, respectively, from a year ago.
MasTec, Inc. MTZ presently sports a Zacks Rank of 1. MTZ delivered a trailing four-quarter earnings surprise of 40.2%, on average. The stock has gained 29.4% in the past six months.
The Zacks Consensus Estimate for MTZ’s 2025 sales and EPS indicates an increase of 8.8% and 43.4%, respectively, from a year ago.
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Otis Worldwide Corporation (OTIS) : Free Stock Analysis Report
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