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OTIS Benefits From R&D Investments, Solid Backlog Level

Otis Worldwide Corporation OTIS is well poised for growth, given the benefits from significant investments in research and development (R&D) and strong growth in orders and backlog in the New Equipment sector. Moreover, the Service segment's noteworthy contributions are amplifying its upward trajectory.

However, dependency on the Chinese market is taking a toll on its results to some extent. China accounted for approximately 17.3% of total net sales in the first nine months of 2023. In third-quarter 2023, New Equipment orders were down due to a decline in the Americas and China. Organic sales were down in the low teens in China in the quarter.

Although shares of OTIS have underperformed the Zacks Building Products - Miscellaneous industry over the past year, earnings estimates have been trending upward. The Zacks Consensus Estimate for earnings per share (EPS) has moved upward over the past 30 days to $3.52 from $3.48. This depicts analysts’ optimism about the stock’s potential. The estimated figure indicates 11% year-over-year growth.

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Zacks Investment Research

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Recently, Otis reported impressive third-quarter 2023 results, wherein earnings and sales surpassed the Zacks Consensus Estimate. Its quarterly results reflected the 12th consecutive quarter of organic sales growth and solid operating margin expansion, which led to high-teens adjusted EPS growth.

What is Favoring OTIS?

Focus on Innovation: At the core of Otis' strategic approach lies a strong commitment to innovation. The company unifies its worldwide research and development (R&D) endeavors through a dynamic operational model that aligns global and local priorities with the specific demands of customers and market segments. At 2022-end, Otis established 11 cutting-edge R&D centers and 17 manufacturing facilities spanning the globe, strategically concentrated in China, India, France, Spain and the United States. These strategic placements facilitate the efficient creation of engineering solutions.

As of Dec 31, 2022, the company owned approximately 4,200 globally issued patents and nearly 2,300 patent applications were pending globally, of which 1,300 applications were filed in the last three years. It expects to continue innovating and expanding the digital ecosystem and a suite of digital solutions for existing service portfolio customers and new equipment shipments from factories.

Solid Backlog: The company remains focused on strong portfolio growth and generating a solid New Equipment backlog. In the third quarter of 2023, New Equipment adjusted backlog at constant currency increased 2% year over year.

The Service segment of OTIS also contributed to the third quarter of 2023 performance. Modernization backlog at constant currency increased 15% year over year.

Upbeat View: Given solid performance in the first nine months of 2023 and with confidence in strategic execution, OTIS provided an impressive 2023 outlook.

For 2023, the company expects adjusted net sales to be nearly $14.1 billion. The new projection indicates approximately 4% growth from the year-ago period. Organic sales growth is projected to be 5.5% (up 3% for New Equipment and 7.5% for Service). Adjusted EPS is anticipated to be $3.52, suggesting 11% year-over-year growth.

Zacks Rank and Other Key Picks

Currently, OTIS carries a Zacks Rank #2 (Buy).

Gates Industrial Corporation plc GTES manufactures engineered power transmission and fluid power solutions. GTES currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

GTES’ expected earnings growth rate for 2023 is 10.5%. The consensus mark for GTES’ 2023 earnings has moved north to $1.26 per share from $1.21 in the past 30 days.

Howmet Aerospace, Inc. HWM is a global manufacturer of engineered products serving the aerospace, defense and commercial transportation industries. The company is expected to benefit from higher aircraft production rates and ease of supply chains in the transportation market.

Howmet Aerospace currently carries a Zacks Rank #2. HWM’s earnings for 2023 are expected to grow 27.1%. The consensus mark for HWM’s 2023 earnings has moved north to $1.78 per share from $1.77 in the past seven days.

Sterling Infrastructure, Inc. STRL currently has a Zacks Rank #2. STRL delivered a trailing four-quarter earnings surprise of 12.2%, on average.

The Zacks Consensus Estimate for STRL’s 2023 sales and EPS indicates growth of 4.9% and 32.3%, respectively, from the previous year’s reported levels.

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