Why Investors Can Ride Otis Worldwide Stock for a Long Time

Although its roots date back to the 1850's iconic American elevator company Otis Worldwide (NYSE:OTIS) has traded as an independent entity on the New York Stock Exchange (NYSE) for less than a year.

Since its recent spin-off from former parent United Technologies, Otis Worldwide has done just fine on its own. The stock made it solo debut on April 3^rd at an opening price of $43.75 and has gone up more than $20 since. Now coming off another impressive quarter, let's hop into why the elevator company can continue to climb higher.

How Did Otis Worldwide Perform in 2020?

Last year Otis Worldwide's organic sales slipped 2.1% and overall sales were down 2.8% to $12.76 billion. However, adjusted earnings per share (EPS) were up 12.5%.

The sales decline was due to 4% lower sales in the equipment division while sales were relatively flat in the service segment. The impacts of COVID-19 undoubtedly played a modest role in the company's ability to market and sell new elevator equipment. Yet the bottom-line improvement was driven by a reduction in selling, general, and administrative (SG&A) expenses, productivity gains, and a lower effective tax rate.

The balance sheet strengthened throughout the course of the year as $350 million of debt was taken off the books. Strong free cash flow generation of $1.3 billion supported management's decision to initiate a 40% dividend payout ratio. Based on this, Otis shares offer a 1.2% forward dividend yield. This along with the company's share buyback plans make it a worthy pick for growth and income investors.

 

From Where Will Otis Worldwide Derive Growth?

Taking a step back, Otis operates in the growing $75 billion global elevator equipment and service industry. It is a less talked about corner of the industrial sector, but once that has produced reliable growth over the years. As economic growth goes, so too does the need for elevators. When developed and emerging economies alike build and upgrade housing, offices, retail space, and entertainment venues, along with it comes demand for safe elevator installations and maintenance.

As a standalone company, Otis is well positioned to benefit from two of the biggest macroeconomics growth trends—urbanization and middle-class growth. The world's urban population is expected to account for approximately 70% of global population by 2050 compared to roughly 55% presently. This along with growth in the middle class globally is expected to drive higher demand for residential, office, and commercial space—and yes, demand for modern elevators.

And like most other industries, even the century and a half old business of elevators has been increasingly going digital. Otis Worldwide's Compass 360 elevator dispatch management system, which is in its third generation, is designed to get people from point A to point B faster by grouping them by destinations in places like office buildings, hospitals, and hotels.

The company even offers a pandemic-friendly app called eCall which allows people to press the up and down buttons on their phones rather than those germ-ridden call buttons. It is innovations like these along with various security integrations and features that make Otis the preferred choice for building management—and that will continue to drive sustainable revenue growth.

 Is Otis Worldwide Stock a Buy?

Even though Otis has been around forever it is still picking up market share. Last year alone it expanded its leading share of the new elevator equipment market by 0.6%. Given the competitive advantages that come with its scale and globally recognized brand, further market share gains are plausible.

Otis expects sales and EPS in its equipment business to be up 5.5% and 8%, respectively at the midpoints in 2021. Growth is expected in all three geographic regions.

Well over half of the company's revenues are derived outside the U.S. including in the EMEA region which represents the largest part of its portfolio. Growth is expected to be led by strength in Asia where a rebound in industrial and construction activity is forecast to be robust. Sales in the lower growth but higher margin service business is forecast to be up 3%.

It is this combination of steady equipment growth and recurring service and maintenance revenue that makes Otis an attractive business model for the long-term investor. In fact, the service side of the business accounts for nearly 60% of revenue. And with a margin that is three times that of the equipment business, it represents about 80% of the company's total operating profits.

This unqiue service-driven, recuring revenue model makes Otis a great way for investors to capitalize on the multidecade growth associated with the rise of middle class urbanites and digitization.

Look for Otis to reach new heights this year as economic activity rebounds—and for its share price to be 'going up' for a long time.