Otis Worldwide (OTIS)

Total return at 5 years: 14.3%/year = 11.7% appreciation + 2.6% dividend. The target price ($116) is ex-dividend; the $11 in dividends collected over 5 years are added separately.

By both methods, the value today (DCF $90 · Multiples $103) exceeds the market price ($67).

Today — fairly valued: at $67 trades ~34.9% below its value discounted to today (~$103); the discount is positive but does not reach the margin of safety we require (≥38%).

At 5 years — Infravalorado: the target price ($116) plus dividends yield above the required average return (10%) — the business compounds.

The bridge: the return at 5 years exceeds the risk-free rate (4.5%) — but the discount does not reach the required margin of safety (≥38%). To require a 15% annual return, it would need to be bought at ~$65.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($67) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The market discounts less growth (-0.7%/year) than we project (4.5%/year) → if the base case holds, there is margin: perception is more pessimistic than the estimated reality.

That growth implies ~$1.5 bn of owner earnings in year 5 (vs ~$1.9 bn of our base case). It recalculates if the DCF assumptions are edited.

Year-by-year projection of the selected scenario. From each year, two versions of the flow are derived: growth FCF (operating flow − total capex, the cash surplus) and maintenance FCF (the owner earnings: what the business yields if it only sustains its capacity). The flow is returned almost in full (dividend + buyback) or redeployed into the operation, so that EV stays roughly flat and multiples compress because the metric grows, not because of cash accumulation. The valuation is done on EV/EBIT. In edit mode, revenue, margins, capex, and exit multiples can be adjusted.

Year 0 is the TTM ended 30-Jun-2026 (US$14,911 million of revenue), on the rolling grid of five twelve-month windows. The base case starts year 1 at +4.3%, anchored to the revised guidance in the 8-K of 22-Jul-2026 (Item 2.02, with the 10-Q for the same quarter already filed on 23-Jul-2026 and ingested into XBRL): sales of US$15,100-15,300 million for fiscal year 2026 (midpoint +5.3% over FY2025) and organic growth 'low to mid single digit' with Service in the mid-to-high single digits and New Equipment between flat and declining. Guided adjusted earnings per share (US$4.01-4.05) is not directly comparable against our GAAP EBIT —it includes items the company excludes for restructuring and transformation—, so the second anchor is used as qualitative corroboration of the range, not as a literal figure in the model. The base case path decelerates-to-accelerates very slightly (+4.3% to +4.7%) on the mix shift: New Equipment (35% of sales, 9% of segment operating profit) is still in double-digit organic decline in China but with less relative drag as it stabilizes, while Service (65% of sales, 91% of operating profit) sustains mid-to-high single-digit organic growth with the modernization backlog growing 26% year over year to June 2026 — the leading signal that matters most. The operating margin (EBIT) starts from the TTM's 15.35% and expands gradually toward 16.7% by year 5 on the growing mix toward Service (segment margin 23.2% versus 3.1% for New Equipment) and the maturing of the UpLift savings program (run rate ~US$200 million, US$282 million of cumulative costs incurred). Capex (TTM US$159 million) is lower than depreciation and amortization (TTM US$172 million), a sign that the business is pure maintenance with no material growth capex — consistent with a capital-light manufacturing/installation/service model. The company returns practically 100% of its free cash flow (TTM dividends US$658 million + TTM buybacks US$1,055 million ≈ US$1,712 million of TTM FCF), so it is modeled with explicit buybacks (sharesPath) and no cash accumulation (accumulateCash: false), consistent with §6. The bear case stresses year 1 to +2.5% (further deterioration in China) with margin compression; the bull case accelerates to +6.0% with a New Equipment recovery and faster margin expansion on Service operating leverage.

Today's elevated multiple is the price of growth: if the business grows, the entry point cheapens on its own going forward (the metric grows while EV stays roughly flat). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—, so the value curve shows whether value creation is concentrated in the early or the later years. The required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $116 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $67, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $116 in 5 years plus $11 of dividends collected (the dividend adds to the return, not to the price) and a required return of 4.5% annually, the maximum to pay today is $103. Against the current market price ($67), the margin of safety is 34.9% (trades below the maximum → there is margin) and the total return at that price would be 14.3% annually.

• Entry multiple. 14× against an industrial band of 12x-18x EV/EBIT.
• Margin of safety. It trades at a real discount to value, though short of the required margin of safety.
• Sensitivity to terminal multiple. A business with 91% of operating profit in recurring Service sustains a multiple in the upper-middle of the band.
• Reverse approach. The current price discounts growth close to the base case; little implied margin of error for negative surprises.

Each margin over sales, year by year: historical (solid line) → projection (dotted).

• ✓ ROIC exceeds the cost of capital (~10%)
• ✓ CFROIC backs up the ROIC (94%, cash vs. accruals)
• ✓ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• ROIC vs the 10% bar. Well above, due to the reduced invested capital given negative book equity and negative working capital.
• Cash conversion. TTM FCF of ~$1,712M against net income of ~$1,516M: conversion above 100%.
• Predictability. High in Service, low in New Equipment given its cyclical, project-based nature.
• SBC trap. Stock-based compensation equivalent to only 4.4% of TTM FCF: does not distort the valuation metric.

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

Service is the profitability engine (91% of segment operating profit with 65% of sales); New Equipment is cyclical and contracting from the real estate slowdown in China. Modernization — the highest-margin segment within Service — is accelerating strongly (backlog +26% year over year as of June 2026), anticipating future revenue already under contract.

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (30-jun-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Organic growth. FY2026 guidance of low-to-mid single digit, with Service at high-mid single digit and New Equipment between flat and declining.
• Modernization backlog. Grows 26% year over year as of June 2026, the business's strongest leading indicator.
• TAM/penetration. The independent maintenance market (~50% of units in service worldwide) is the main growth lever via capture.
• Capital cycle. The industry has few dominant global players; local regulatory barriers discourage the entry of new scale competitors.

• Revenue recurrence. 65% of sales and 91% of segment operating profit come from Service, a renewable-contract business.
• Competitive position. One of the few global leaders alongside KONE, Schindler, and TK Elevator, with presence in more than 200 countries and territories.
• Pricing power. Moderate: New Equipment is bid at a competitive fixed price; Service has greater ability to pass through costs.
• Cyclical exposure. New Equipment falls more than 20% organically in China from the real estate slowdown, dragging down consolidated growth.
• Operating leverage. Service has a 23.2% segment margin versus 3.1% for New Equipment: the mix shift toward Service expands the consolidated margin over time.

Not all debt is equal: only the structural needs refinancing; the rest is operational (self-liquidating).

Structural debt is what is exposed to the contraction phase of the cycle; operational debt (leases, matched funding) self-liquidates with the business.

• ✕Leverage (net debt / EBITDA)Net debt / EBITDA 3.0x
• ✓Interest coverage (EBIT / interest)12.0x
• –Liquidity (current ratio)no data
• ✓Cash quality (CFROIC vs ROIC)CFROIC backs 94% of ROIC
• ✓Value creation (ROIC − 10% bar)+93pp
• ✓Malinvestment test (capex vs incremental ROIC)Capex/D&A 0.9x — no over-investment
• !Float / working capitalConsumes cash $0.2 bn (positive WC)
• ✓Dilution (SBC % of revenue + shares)SBC 0.5% of revenue

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Leverage. Gross debt of $8,226M vs TTM EBITDA of ~$2,461M (EBIT+D&A): ~3.3x debt/EBITDA.
• Negative book equity. –$5,748M, from buybacks sustained above retained earnings; not a sign of insolvency given the stable operating cash flow.
• Liquidity. Cash of $813M and demonstrated access to the debt market ($700M issuance in the second quarter of 2026).
• Interest coverage. TTM EBIT amply covers estimated interest expense, with headroom despite nominal leverage.

Who owns the shares — the alignment and whether there is a controlling shareholder.

• CEO tenure. Judy Marks has led since the 2020 spin-off, with strategic continuity.
• Skin in the game. Directors and executives as a group own less than 1% of shares according to the 2026 proxy.
• Capital allocation. Payout close to 100% of free cash flow via dividend and buyback; little retention for organic reinvestment.
• Transparency. The earnings release breaks out results by segment and reconciles adjusted figures against GAAP in detail.

• Lack of enthusiastic coverage: Otis trades like a mature, low-growth industrial, without the favor given to higher-volatility stories, even though 91% of its operating profit comes from a recurring, high-margin Service business.
• The New Equipment segment is depressed by the real estate slowdown in China (organic decline greater than 20%), which penalizes the perception of consolidated growth even though it is the smallest share of profitability.
• Revised 2026 guidance (adjusted EPS of $4.01-4.05, with adjusted operating profit below the prior year) generated short-term noise over a business whose structural engine — Service — continues to accelerate (modernization backlog +26%).

The gap between perception and reality lies in the consolidated growth reading, which averages a low-profitability cyclical business with a high-profitability recurring one without distinguishing the real weight of each.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at +2%/year (+12% total): the margin of safety protects the downside. The bull (+22%/year, +165% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• China. More than 20% organic decline in New Equipment from the real estate slowdown; a growing portion of Service also depends on that market.
• Antitrust litigation. Active claims in Europe of alleged price collusion in elevators and escalators.
• Currency. 71% of sales are international; a strong dollar has compressed reported results in recent years.
• Corporate structure in China. The group's largest joint venture operates with a local partner; regulatory changes could alter the ownership structure.
• Contract execution. Competitive fixed-price contracts carry exposure to cost overruns or delay penalties on complex projects.

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  A wide moat and ROIC 103% above the 10% bar, but the margin is limited (+35%) → excellent business at a fair price.

• Peter Lynch Growth at a reasonable price (GARP)

  A cyclical growing 5% at a multiple/growth of 3.2 → expensive for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Earnings yield 7% (EBIT/EV) + ROIC 103% → brushes the Magic Formula.

• Howard Marks Perception vs reality + cycle

  The price discounts -1% vs our 5%: perception is more pessimistic than reality, with an identified source of the discount.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor -1%/yr, bull-scenario ceiling +19%/yr over 5y → capital protected, asymmetry in your favor.

• Pat Dorsey Moat strength (Five Rules)

  A wide moat, stable; sources: switching costs, efficient scale, intangibles, cost advantage → passes the Five Rules.

• Aswath Damodaran Expectations implied by the price

  Justifying the price requires discounting -1%, within what we project (5%) — the story squares with the numbers.