Otis Shares Have Lagged, But The Service Opportunity Could Still Be Underappreciated

I wasn’t all that excited about the opportunity in Otis Worldwide (OTIS) shares in late September, and the shares have lagged since then – rising less than 5% against a 20% move for the wider industrial sector and 20%-plus moves in other building equipment stocks like Johnson Controls (JCI), but doing about 10% better than Kone (OTCPK:KNYJY), which I also thought was expensive, and Schindler (OTCPK:SHLAF) in the elevator niche.

Looking at 2021, while Otis does have a decent backlog supporting new equipment revenue, I’m concerned about weakness across the construction space, including multifamily, office, and hospitality. I’m also concerned the assumptions across the industrial sector from management teams that they’ll just be able to pass on any material cost headwinds in the year. I’m more bullish on the opportunities to leverage IoT to drive more lifecycle revenue and gain maintenance share from independents, but that’s going to be a multiyear story.

Otis did beat and raise, and the underperformance has improved the relative valuation argument. I still don’t really like the stock here, but I could see non-resi equipment names getting a little more love later in the year, and this is a borderline name today.

 

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Otis Shares Have Lagged, But The Service Opportunity Could Still Be Underappreciated

Otis Needs To Fill A Few Gaps But Has Meaningful Modernization Leverage

Conglomerates aren't always the best at responding to the needs of individual businesses within the group; sometimes, it simply makes more sense to reinvest cash flow in more promising businesses. Given that spin-outs can often outperform once they're out on their own and can make their own decisions (it's a phenomenon that Peter Lynch talked about a lot). Investors in Otis Worldwide (OTIS) should hope that's the case, as the company looks as though it needs to make up for some lost time and opportunities.

To be clear, Otis isn't a bad business. It's my opinion, though, that the company has been surpassed by rivals like KONE (OTCPK:KNYJY) and Schindler (OTC:SHNDY) in areas like digitalization and in the faster-growing Chinese market. Valuation already looks pretty healthy here, but that's not uncommon in the space.

 

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Otis Needs To Fill A Few Gaps But Has Meaningful Modernization Leverage