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Otis (OTIS) Rides on Innovation Amid Russia-Ukraine Woes

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Despite projecting a decline in the past year, Otis Worldwide Corporation OTIS stock strongly outperformed the Zacks Building Products - Miscellaneous industry. It is well poised for 2022, given its focus on innovation and investments in research and development ("R&D"). OTIS’ solid performance is a testament to this fact.

The company delivered 3.1% organic growth in first-quarter 2022 and registered 6.9% growth in adjusted earnings per share. The upside was backed by operating profit growth, a reduction in share count and a lower effective tax rate. Its long-term strategy and innovative solutions as well as services to customers also bode well.

Yet, the ongoing crisis in Ukraine, extensive research and development expenses and cost pressures are ailing this leading elevator and escalator manufacturer.

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Zacks Investment Research

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Let’s delve deeper into the factors influencing this Zacks Rank #3 (Hold) firm’s growth trajectory. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Growth Drivers

Focus on Digital Innovation: OTIS’ emphasis on innovation is core to its strategy. In 2021, 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. 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.

In 2022, 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.

Strong Prospect: Otis Worldwide posted impressive results over the last few quarters. First-quarter 2022 New Equipment orders were up 8.8% at constant currency, with growth across the regions. Segment backlog increased 4% from the prior year, with 6% growth at constant currency.

Backed by strong results, the company expects net sales growth within 0.5-1.5%, organic sales improvement of 3-4%, adjusted operating profit to be $2.2-$2.25 billion at constant currency and adjusted earnings to be $3.22-$3.27 per share, indicating 9-11% year-over-year growth. Notably, these projections exclude Russia-based operations.

The Zacks Consensus Estimate for 2022 earnings of $3.25 per share indicates 8% year-over-year growth. The same for 2023 earnings is currently pegged at $3.65, reflecting 12.2% growth from 2022. The company currently has a VGM Score of A, supported by a Value Score of B, and Growth and Momentum Score of A.

Strong Liquidity Position: OTIS has been maintaining a strong liquidity position to navigate through the current challenging environment. The company ended the first quarter with $1.24 billion in cash and cash equivalents along with a $1.5-billion unsecured, unsubordinated five-year revolving credit facility. At March 2022-end, its long-term debt totaled $6.69 billion, down from $7.25 billion. Also, it has no significant debt maturity until 2023.

Hurdles to Cross

Operations in Russia: Owing to the ongoing crisis in Ukraine, Otis has concerns about the long-term sustainability of its operations in Russia, especially with mounting regulations and supply chain disruptions. The Russia business contributed 2% to total revenues, mostly in the New Equipment business, in 2021. Although the company is finding solutions and exploring alternatives for the Russia business, any uncertainty may hamper its future earnings performance.

Input Cost Inflation: Elevators, escalators and related equipment need extensive research and development, and hence involve costs. Again, inflation and higher cost of the inputs could dampen its overall results. Although incremental cost of the technology is relatively low, real cost of installation of that technology is still growing. The company is highly committed to joint ventures, owing to which it experiences higher costs, which thereby pressurize margins.

The company does not rely on single supplier. However, some components or applications require particular specifications or qualifications. In those cases, there may be a single supplier or a limited number of suppliers that can readily provide such components, which could result in supply constraints or cost pressures including financial or operational difficulties or a contract dispute.

Some Better Ranked Stocks From Broader Construction Sector

Louisiana-Pacific Corporation LPX or LP is a leading manufacturer of sustainable, quality engineered wood building materials, structural framing products as well as exterior siding. This Zacks Rank #1 stock has been benefiting from solid demand from the U.S. residential market and repair and remodeling (R&R) business. Strategic business transformation, effective cash management and inorganic moves are likely to boost its future performance.

The Zacks Consensus Estimate for LPX’s 2022 earnings has moved up to $14.87 per share from $13.02 in the past 30 days.

Weyerhaeuser Company WY is one of the leading U.S. forest product companies. This Zacks Rank #1 stock has been benefiting from solid new residential construction activity, which in turn is leading to improved demand. Also, its focus on operational excellence has been advantageous over time.

The Zacks Consensus Estimate for WY’s 2022 earnings has moved up to $3.20 per share from $2.83 in the past 30 days.

Boise, ID-based Boise Cascade Company BCC — which currently carries a Zacks Rank #2 — is aided by factors like favorable commodity wood products, pricing, and robust construction activity.

BCC’s earnings estimate for 2022 has moved north to $18.43 per share from $15.07 in the past 30 days.

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Otis Worldwide Corporation (OTIS) : Free Stock Analysis Report
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