Otis (OTIS)

Elevator manufacturer Otis (NYSE:OTIS) met Wall Street’s revenue expectations in Q1 CY2025, but sales fell by 2.5% year on year to $3.35 billion. The company’s full-year revenue guidance of $14.7 billion at the midpoint came in 1.2% above analysts’ estimates. Its non-GAAP profit of $0.92 per share was 1.1% above analysts’ consensus estimates.

Company Overview

Credited with inventing the first hydraulic passenger elevator, Otis Worldwide (NYSE:OTIS) is an elevator and escalator manufacturing, installation and service company.

Automation that increases efficiency and connected equipment that collects analyzable data have been trending, creating new demand for general industrial machinery companies. Those who innovate and create digitized solutions can spur sales and speed up replacement cycles, but all general industrial machinery companies are still at the whim of economic cycles. Consumer spending and interest rates, for example, can greatly impact the industrial production that drives demand for these companies’ offerings.

Competitors offering similar products include KONE (HEL:KNEBV), Schindler (SWX:SCHN), and Thyssenkrupp Elevator (FWB:TKA).

A company’s long-term performance is an indicator of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last five years, Otis grew its sales at a sluggish 1.8% compounded annual growth rate. This fell short of our benchmarks and is a rough starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Otis’s annualized revenue growth of 2.2% over the last two years aligns with its five-year trend, suggesting its demand was consistently weak.

Otis also reports organic revenue, which strips out one-time events like acquisitions and currency fluctuations that don’t accurately reflect its fundamentals. Over the last two years, Otis’s organic revenue averaged 3% year-on-year growth. Because this number aligns with its normal revenue growth, we can see the company’s core operations (not acquisitions and divestitures) drove most of its results.

This quarter, Otis reported a rather uninspiring 2.5% year-on-year revenue decline to $3.35 billion of revenue, in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 2.4% over the next 12 months, similar to its two-year rate. This projection is underwhelming and indicates its newer products and services will not lead to better top-line performance yet.

Otis’s gross margin is slightly below the average industrials company, giving it less room to invest in areas such as research and development. As you can see below, it averaged a 29.2% gross margin over the last five years. That means Otis paid its suppliers a lot of money ($70.82 for every $100 in revenue) to run its business.

In Q1, Otis produced a 29.9% gross profit margin, in line with the same quarter last year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs (such as raw materials and manufacturing expenses) have been stable and it isn’t under pressure to lower prices.

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Otis has been an efficient company over the last five years. It was one of the more profitable businesses in the industrials sector, boasting an average operating margin of 14.6%. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it’s a show of well-managed operations if they’re high when gross margins are low.

Analyzing the trend in its profitability, Otis’s operating margin might fluctuated slightly but has generally stayed the same over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Otis’s EPS grew at a solid 11.6% compounded annual growth rate over the last five years, higher than its 1.8% annualized revenue growth. However, this alone doesn’t tell us much about its business quality because its operating margin didn’t expand.

Diving into the nuances of Otis’s earnings can give us a better understanding of its performance. A five-year view shows that Otis has repurchased its stock, shrinking its share count by 7.9%. This tells us its EPS outperformed its revenue not because of increased operational efficiency but financial engineering, as buybacks boost per share earnings.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For Otis, its two-year annual EPS growth of 9.5% was lower than its five-year trend. We hope its growth can accelerate in the future.

In Q1, Otis reported EPS at $0.92, up from $0.88 in the same quarter last year. This print beat analysts’ estimates by 1.1%. Over the next 12 months, Wall Street expects Otis’s full-year EPS of $3.86 to grow 8.3%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Otis has shown robust cash profitability, enabling it to comfortably ride out cyclical downturns while investing in plenty of new offerings and returning capital to investors. The company’s free cash flow margin averaged 10.5% over the last five years, quite impressive for an industrials business.

Taking a step back, we can see that Otis’s margin dropped by 2.8 percentage points during that time. If its declines continue, it could signal increasing investment needs and capital intensity.

Otis’s free cash flow clocked in at $156 million in Q1, equivalent to a 4.7% margin. This cash profitability was in line with the comparable period last year but below its five-year average. In a silo, this isn’t a big deal because investment needs can be seasonal, but we’ll be watching to see if the trend extrapolates into future quarters.

Otis reported $1.92 billion of cash and $8.73 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $2.49 billion of EBITDA over the last 12 months, we view Otis’s 2.7× net-debt-to-EBITDA ratio as safe. We also see its $125 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

Revenue was just in line but EPS beat. Looking ahead, Otis lifted full-year revenue guidance, and the updated figure slightly beat analysts’ expectations. On the other hand, its organic revenue in the quarter fell short of Wall Street’s estimates. Overall, this wasn't a perfect quarter, but it was still a decent one. The stock traded up 1.2% to $99.99 immediately after reporting.

Updated: May 22, 2025 at 11:23 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Otis.

Otis doesn’t pass our quality test. For starters, its revenue growth was weak over the last five years. And while its strong operating margins show it’s a well-run business, the downside is its organic revenue growth has disappointed. On top of that, its cash profitability fell over the last five years.

Otis’s P/E ratio based on the next 12 months is 23.2x. This valuation tells us it’s a bit of a market darling with a lot of good news priced in - you can find better investment opportunities elsewhere.

Wall Street analysts have a consensus one-year price target of $101.86 on the company (compared to the current share price of $97.18).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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