Otis Worldwide (OTIS)
Industrial / Ascensores y Escaleras Mecánicas
Otis is the world's largest manufacturer and installer of elevators and escalators, but its real business is service: 65% of sales and 91% of segment operating profit come from maintaining 2.5 million units under recurring contracts, while New Equipment — cyclical and today depressed by China — contributes only 9% of profitability, with a modernization backlog growing 26% year over year that anticipates several years of revenue already under contract.
- Price
- $72.06
- Intrinsic value (5y, base)
- $116
- Total annual return (5y)
- 12.4%
- Status (nominal)
- Undervalued
- Margin of safety
- +30%
The essentials
- 91% of segment operating profit comes from Service, a renewable-contract business with high switching costs and ~2.5 million units under maintenance.
- New Equipment falls more than 20% organically in China, dragging down consolidated growth despite representing only 9% of segment profitability.
- Payout close to 100% of free cash flow via dividend and buyback; ROIC is exceptionally high because invested capital is small (negative book equity from years of buybacks, offset by the negative working capital of advance billing).
Intrinsic value — two valuation methods
Total return at 5 years: 12.5%/year = 10.0% appreciation + 2.5% 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 ($72).
Pillars of the analysis
The verdict — today vs 5 years
Today — fairly valued: at $72 trades ~29.7% 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.
Thesis
The business
Otis is, in practice, a high-margin recurring service business (91% of segment operating profit) disguised as a heavy-equipment manufacturer. The cyclical segment — New Equipment — carries little weight in profitability but a lot in the perception of consolidated growth, which distorts how the market reads the business.
The valuation
It is valued by EV/EBIT on the consolidated business (industrial band 12x-18x, positioned in the upper-middle range given Service's weight). The base case projects a 5-year value of $116 against a price of $72, a Undervalued equivalent to +12% annually.
The margin of safety
It trades at a real discount to value, though short of the required margin of safety. The 15% annual hurdle — the bar for a great investment — requires an entry price of -11%; total return also incorporates the dividend, which adds a growing component on top of the market price.
What to watch
The central disconfirmer is China: if the organic decline in New Equipment (currently greater than 20%) does not bottom out, the pool of new units that feed future conversion into Service contracts shrinks, compromising the long-term engine beyond the short-term noise that today penalizes the consolidated reading.
Educational / informational. Does not constitute investment advice.