Otis Worldwide Corp (NYSE: OTIS) reported its Q2 earnings yesterday for the quarterly period ended June 30, 2022. Earnings per share (EPS) of $0.86 beat FactSet consensus estimates of $0.78 by 10.2%. But company revenues of $3.48bn missed FactSet sales consensus of $3.54bn by -1.7%.
OTIS stock is currently trading around $76.44.
What is Otis Worldwide Corp?
Otis Worldwide Corp. (OTIS stock) is the world's leading elevator and escalator manufacturing, installation, and service company. Otis moves 2 billion people daily and maintains more than 2.1 million customer units worldwide. This represents the industry's largest maintenance portfolio.
Otis operates through two segments, New Equipment and Service. The New Equipment segment designs, manufactures, sells, and installs a wide range of passenger and freight elevators.
The Service segment offers maintenance and repair services and modernization services to upgrade elevators and escalators.
Otis employs 70,000 people, including 41,000 field professionals, which serves its customers through a global network. These include sales personnel, field technicians with different installation and service skills, and engineers driving continued product development and innovation.
The company operates in over 200 countries and territories worldwide and is headquartered in Farmington, Connecticut, USA. Elisha Graves Otis founded Otis in 1853.
In Q1, Otis acquired 95.51% of Zardoya Otis. Zardoya Otis shares were delisted in early May 2022.
OTIS Stock Q2 Financial Results
On Wednesday, July 27, 2022, Otis Worldwide Corp reported its financial results for its second quarter, which ended June 30, 2022.
Key Earnings Highlights:
Net Sales: $3.5bn (down 5.7% Y/Y)
Organic Sales Growth: up 0.4% Y/Y
Adjusted EPS: $0.86 (up 11.7% Y/Y)
Share Buybacks: $200m
Free Cash Flow: $326m
OTIS reported a solid second quarter, making progress on its long-term strategy. It enjoyed record new equipment orders, and its maintenance portfolio rose 3.5%, with retention, conversion, and recapture rates up Y/Y.
Judy Marks, Chair, CEO & President, said:
Otis completed a strong first half, delivering a solid second quarter with record New Equipment orders and the best maintenance portfolio growth in over a decade. We grew adjusted EPS low teens, driven by strong organic growth in the Service business and productivity performance in both segments that helped to overcome the impact of lockdowns in China, higher commodity prices and significant headwinds from the strengthening of the US Dollar,
Looking ahead, we expect to deliver 2.5 to 3.5% organic sales growth, high single digit adjusted EPS growth and $1.6 billion in free cash flow in 2022. We'll continue to advance our long-term strategy and drive operational execution to set a strong foundation for continued performance in 2023 and beyond.
OTIS stock also appeared in our earnings preview this week.
OTIS In Los Angeles
Otis is supporting the modernization of Terminal 4 at LAX. The company will provide 13 Gen3 elevators, extending its relationship with the general contractor, Hensel Phelps, and marking its latest project at LAX.
OTIS in Paris
Otis is supporting the construction of the Tour Triangle, a 180-meter high tower that will include office, hospitality and retail spaces. During the construction phase, an Otis SkyBuild self-climbing elevator will ascend as the floors are built, providing speed and simplified logistics to the building's construction teams. Otis will help support the structure with space-saving solutions like its Gen360 platform, SkyRise double-deck elevators and Compass 360 destination dispatching.
OTIS in South China's Greater Bay Area
Otis is supporting several projects to fuel innovative city development. This includes 140 SkyRise and Gen3 elevators and escalators in Guangzhou's Canton Fair Complex, including IoT systems that will monitor performance in real-time.
OTIS in Shenzhen
The new China Life Insurance Tower in the Central Business district will be served by 20 Otis SkyRise elevators. And in Zhuhai, Otis will provide nearly 90 elevators and escalators for the Nanping Royal Times Square. This project will include Gen3 elevators equipped with Otis' latest Ambiance features and digital technologies serving passengers headed to offices, shopping centers and hotels.
OTIS in Korea
Otis was selected to provide more than 45 elevators and escalators in the Teacher's Pension Tower in the financial district of Seoul. This project will include Otis’ Compass 360 destination dispatching system to move tenants between nearly 50 floors seamlessly.
VP, CFO Resignation
Rahul Ghai, Executive VP and CFO, resigned from Otis Worldwide Corporation with notice that he will leave on August 12, 2022, to join another company. Mr. Ghai’s resignation was not a result of any dispute or disagreement with the Company.
The OTIS Board of Directors has appointed Anurag Maheshwari as its Executive VP and CFO, effective August 12, 2022. Mr. Maheshwari, 48, has worked at the Company since February 2020 as its VP of Finance, IT and Chief Transformation Officer of Otis Asia Pacific. Before that, Mr. Maheshwari most recently served as Vice President, Investor Relations for Harris Corporation from 2017 to 2019 and for L3 Harris Technologies from 2019 to 2020.
OTIS stock has risen 70% since it went public in March 2020 after separating from United Technologies (NYSE: UTX), which became Raytheon Technologies Corp (NYSE: RTX).
How Does Otis Worldwide Make Money?
Otis Worldwide makes money from the sales of its elevators, elevator parts, and maintenance plans.
The company functions under a centralized operating model whereby a global strategy is set around New Equipment and Service. That's because Otis seeks to grow its maintenance portfolio, partly through the conversion of new elevator and escalator installations into service contracts. Accordingly, the company benefits from an integrated global strategy, which sets priorities and establishes accountability across the entire product lifecycle.
OTIS Stock Financials
OTIS stock has a price-to-earnings ratio (P/E) of 26.3, compared to the industry average of 1.4. Its price-to-sales value (P/S) is 2.3, above the industry average of 1.3. OTIS stock offers shareholders a 1.5% dividend yield.
Over the past year, Otis Worldwide Corp (OTIS) has traded between $66.97 and $92.84.
Year-to-date, the OTIS stock is down by -10.67%, while the S&P 500 is down -16.11% over the same period.
Otis’ company margins for the first six months of 2022 are up 140 basis points from pre-COVID levels during the comparable period in 2019. Its free cash flow generation of $800m enabled Otis to repay $500m of debt, raise dividends by 20% and complete $400m in share repurchases.
OTIS Growth Potential
Otis revised its full-year 2022 outlook, expecting organic sales growth of 2.5% to 3.5%, with net sales in the range of $13.6bn to $13.8bn. Adjusted operating profit is expected to range from $2.1bn to $2.2bn, while adjusted EPS projections come between $3.17 and $3.21, up 7% to 9%.
After approximately $145m in headwinds from foreign exchange translation, the adjusted operating profit at actual currency is expected to be up $5m to down $25m. And free cash flow of approximately $1.6bn is expected.
OTIS Stock Risks
Based on the Russia-Ukraine war and ongoing supply chain disruptions, Otis reassessed its Russian operations. This represented around 2% of its 2021 revenue and profit, mainly New Equipment.
In Q2, Otis opted to divest its Russian business to Russia-based investment company Ice Development. As the mounting regulations became difficult to navigate.
Judith F. Marks, Chair, Chief Executive Officer & President, Otis Worldwide Corp, commented:
Closing of the transaction is expected imminently. We remain hopeful for a return to peace and stability in the region, and we will continue to contribute to the ongoing relief and humanitarian efforts in Ukraine. This quarter and going forward, Otis' Russia operations and related non-recurring charges are excluded from our adjusted results, prior year compares and our outlook.
COVID-19 continues to impact customer demand but is not a significant concern.
Commodity price increases and annual wage inflation are hitting the company’s bottom line. However, Q2’s commodity inflation of $35m was in line with prior expectations and mostly mitigated by installation and material productivity and lower SG&A expense.
The company tries to hedge and lock in rates with suppliers to help achieve accurate forecasts. However, Otis finds hedging a bit challenging, given that the grades of steel it buys don't always have a corresponding index. Overall, it is about 80% locked for the year and almost 100% locked for Q3.
Rising input costs could cause a slowdown in construction projects, with a knock-on effect on demand for Otis’ products. However, the company does not appear overly concerned about the current slowdown. It is witnessing delays in North American construction projects, but this seems to be due to labor shortages rather than costs.
Should You Invest in Otis Worldwide Corp?
Otis Worldwide is operating an essential business critical to infrastructure projects globally. This unassuming stock comes with a 1.5% dividend yield to sweeten the deal.
The company is shareholder-friendly and committed to dividend payments and share buybacks. Indeed, Otis has carried out $400m of share buybacks in the first half of this fiscal year and is now positioned to target $700m for full-year 2022.
Whether you buy shares in Otis Worldwide Corp depends on your conviction of its future performance.