Here is How Otis (OTIS) is Poised for 2023 Amid Industry Woes
Otis Worldwide Corporation OTIS has been delivering strong results over the past few quarters amid industry challenges. The company has been focusing on innovation, investments in research and development ("R&D") and acquisitions. Also, a solid prospect for the New Equipment business as well as strong performance in Services unit are adding to the bliss.
In the past year, the stock strongly outperformed the Zacks Building Products - Miscellaneous industry. Despite significant currency headwinds, extensive research and development expenses and input cost pressures, solid order and backlog numbers are providing visibility.
The Zacks Consensus Estimates for 2023 earnings is currently pegged at $3.45 per share, suggesting an increase of 9.4% from 2022 level on 0.8% year over year higher revenues. In the past four quarters, it has topped analysts’ expectations with an average surprise of 5.3%.
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Notably, the consensus mark for fourth-quarter 2022 earnings has moved up by one cent to 73 cents in the past seven days. This shows positive analysts’ expectations.
Let’s delve deeper into the factors boosting this leading elevator and escalator manufacturer’s growth trajectory.
Strong Orders & Backlogs: Otis has been banking on strong orders in the New Equipment unit. Orders were up 8.8% in the first quarter, 16.5% in the second quarter and 7.4% in the third quarter at constant currency. Segment backlog increased 4% at first quarter-end and 6% at second quarter-end from the respective prior year. In the third quarter, new equipment backlog was flat and the adjusted backlog increased 12% at constant currency, with growth in all regions.
Digital Innovation Drive, a Boon: OTIS’ emphasis on innovation is core to its strategy. Last year, it invested $159 million or 1.1% of net sales, in R&D after investing $152 million in 2020. Otis also invested about $59 million in digital and strategic initiatives in 2021. The company maintained its R&D investment in 2022 as well, particularly in product innovation with its Gen3 offering.
Otis connects global R&D efforts through an operating model that sets global and local priorities based on customer and segment needs. In 2021, it launched the successors to the Gen2 family of elevators: the Gen3 and Gen360 digital elevator platforms. These platforms enhance the space-saving, energy-efficient design of the Gen2 elevator with the connectivity of the Otis ONE IoT (Internet of Things) digital service platform.
It 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.
Accretive Buyouts: Otis has been strategically expanding its business reach to international markets through joint ventures and non-wholly owned subsidiaries. The company operates in China through two joint ventures, namely, Otis Elevator (China) Investment Company Limited (“Otis China”) and Otis Electric Elevator Company Limited (“Otis Electric”).
Zardoya Otis S.A. in Spain manufactures, installs and services elevators and elevator equipment, as well as exporting elevator equipment for installation by certain other subsidiaries outside the country. In Sep 2021, the company announced a tender offer to acquire all of the issued and outstanding shares of Zardoya Otis, which are not owned by Otis. The company successfully delisted Zardoya Otis in early May.
In the first six months, it invested $28 million in businesses and intangible assets, net of cash acquired.
Strong Liquidity to Boost Shareholders’ Value: OTIS ended third-quarter 2022 with $1.03 billion in cash and cash equivalents along with a $1.5 billion unsecured, unsubordinated five-year revolving credit facility. At third-quarter 2022-end, its long-term debt totaled $6.46 billion, down from $7.25 billion at 2021-end. Also, it has no significant debt maturity until 2023.
The company is constantly enhancing its shareholders’ value through regular dividend increases and repurchases. It generated $326 million in free cash flow while continuing to return cash to shareholders. On Apr 24, the company announced a quarterly dividend hike of 20.8% to 29 cents per share. This represents 45% dividend growth since it became a public company. Also, it announced a $1 billion shares repurchase authorization in the first quarter. At the third quarter’s end, it repurchased a $700 million shares from its common stock.
Zacks Rank & Key Picks
Currently, Otis carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Some better-ranked stocks in the same space are CRH plc CRH, Hillman Solutions Corp. HLMN and United Rentals, Inc. URI, each sporting a Zacks Rank #1.
CRH manufactures cement, concrete products, aggregates, roofing, insulation and other building materials.
CRH’s expected earnings growth rate for 2023 is 18.4%. The Zacks Consensus Estimate for 2023 earnings has improved to $3.86 per share from $3.42 in the past 60 days.
Hillman is one of the largest providers of hardware-related products and related merchandising services to retail markets in North America.
HLMN’s expected earnings growth rate for 2023 is negative 9%. The Zacks Consensus Estimate for next-year’s earnings has improved to 33 cents per share from 30 cents over the past seven days.
United Rentals has been benefiting from a broad-based recovery of activity across the end markets served. Also, higher margins from rental revenues and used equipment sales are added benefits.
The consensus mark for URI’s 2023 earnings rose to $37.14 per share from $36.81 in the past 30 days. This suggests 14.2% growth year over year.
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United Rentals, Inc. (URI) : Free Stock Analysis Report
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Otis Worldwide Corporation (OTIS) : Free Stock Analysis Report
Hillman Solutions Corp. (HLMN) : Free Stock Analysis Report
