Wide Moat Business Type Series: Elevator Manufacturers

by: The Value Pendulum

Summary

Elevator manufacturers are the second in a series of articles on wide moat business types; elevator manufacturers' wide moat lies with the high switching costs.

Not all elevator companies are equally attractive; investors will prefer ones with a larger proportion of revenue contribution from the maintenance and modernization segments and higher growth geographic markets.

I found 14 listed elevator manufacturers globally; nine of them are listed in Europe & Canada and the remaining five are Asian-listed stocks.

I first explored the idea of sourcing potential wide moat investment candidates from business types boasting structural competitive advantages and economic moats in an article titled "Wide Moat Business Type Series: Airports." I have picked elevator manufacturers as the second wide moat business type that I will analyze. While airport operators, the topic of my inaugural article in the series, benefit from regulatory barriers to entry and "natural monopoly" characteristics, elevator manufacturers are the beneficiary of high customer switching costs.

The Wide Moat Of Elevator Manufacturers

Customer stickiness is one of the key competitive advantages that incumbent elevator manufacturers enjoy over new entrants. Although no building operator is likely to be lauded for their world-class elevators, they will incur the wrath of occupants if the elevators suffer from failures and stoppages on a regular basis. As a result, building operators typically weigh the costs of serious mechanical failures for their elevators versus the benefits of entering into a more attractively priced elevator maintenance program, and decide to stick with the original elevator manufacturer for maintenance services. In addition, there will be significant business disruption, if the elevator breaks down during the transition period from an existing maintenance services provider to a new one.

Another way to assess the high switching costs embedded within the elevator manufacturing business is to view it as a razor & blade model. Elevator manufacturers usually market their elevators at prices equating to marginal or zero profits and generate their returns from long-term maintenance service agreements. This makes perfect sense from the perspective of customer price sensitivity, as clients tend to be price sensitive when it comes to a big-ticket item like the initial installation of elevators (the 'razor'), but become less price sensitive pertaining to small (relative to initial installation cost) and recurring payments over a long period. This allows elevator manufacturers to earn high margins on the maintenance contracts (the 'blades').

The elevator industry is also one that favors the large players over their sub-scale competitors, given the importance of scale economies in manufacturing, maintenance and research & development. Market leaders in the elevator industry leverage on economies of scale with respect to servicing their clients for elevator maintenance contracts, as they benefit from high installed base/customer density in local markets which lowers the overall cost of logistics and transportation. Furthermore, as elevators become increasingly complex in terms of automation, monitoring and energy-saving features, incumbents have the luxury of investing a greater (but similar to competitors based on percentage of sales) amount of monies in research & development to stay ahead of competitors e.g. faster elevators to reduce waiting time for passengers.

Attractive financial characteristics of the elevator business include stable, recurring cash flow from installed base of elevators under maintenance contracts and a negative working capital model.

Analyzing Elevator Manufacturers As Wide Moat Investment Candidates

There are several key questions that investors should ask themselves prior to investing in any listed elevator manufacturer:

  • What is the company's revenue mix between lower margin installation segments and higher margin maintenance and modernization segments?
  • What is the company's revenue split between different geographies? Is it either dominant or growing in markets benefiting from urbanization, modernization, property upgrades, low elevator density and an ageing population?
  • What is the average conversion rate of installation to maintenance? How difficult is it for an independent maintenance company to secure an elevator maintenance without being involved in the installation of the original elevator?
  • Are building operators the ones making the decision on elevator maintenance contracts? Or do general contractors in charge of building construction have the final say?
  • Do building operators choose to either maintain the elevators on their own or outsource maintenance to smaller, cheaper independent players?
  • What are the expectations for future replacement demand? Factors include ageing installed base, quality of existing elevators constructed, changes in regulations on building safety.
  • What is the prevalence of elevator accidents in the market(s) that the company operates in?

Listed Elevator Manufacturers

I found 14 listed elevator manufacturers globally in my search for this category of wide moat businesses; nine of them are listed in Europe & Canada and the remaining five are Asian-listed stocks.

Please find below a quantitative snapshot of these nine elevator companies listed in Europe & Canada, based on data accurate as of January 22, 2016:

Stock Exchange P/E P/B EV/EBIT EV/EBITDA EBITDA Margin EBIT Margin Net Margin Gross Profit/Total Assets ROA ROIC*
Doppler S.A. (ATH:DOPPLER) Athens Stock Exchange n/a 5.2 33.4 1990.5% 11.0% 7.5% -0.6% 14.1% n/a 6.8%
Kleeman Hellas S.A. (OTCPK:KLEEF) (NYSEARCA:KLEM) Athens Stock Exchange 11.2 0.4 7.2 519.1% 11.7% 9.3% 4.7% 25.6% 2.7% 8.4%
Symax Lift (Holding) Co., Ltd (OTC:SYMZF) (CVE:SYL) TSX Venture Exchange n/a 0.2 -22.1 13498.3% 7.6% 5.0% 0.6% 21.8% -4.9% -15.9%
KONE Corporation (OTCPK:KNYJY) (HEL:KNEBV) Helsinki Stock Exchange 23.8 9.0 13.3 1220.7% 15.3% 14.1% 10.6% 58.8% 13.4% 712.0%
Zardoya Otis SA (OTC:ZRDZF) (MCE:ZOT) Mercado Continuo Espana 27.2 11.3 19.7 1765.4% 33.0% 29.8% 21.0% 76.3% 20.9% n/a
TTS Group ASA (NASDAQ:TTS) Oslo Stock Exchange 1.8 0.3 6.0 419.2% 4.2% 2.1% -0.8% 42.9% 5.5% -27.3%
Alimak Group publ AB (STO:ALIG) Stockholm Stock Exchange 61.7 1.7 11.5 998.3% 19.3% 16.5% 2.7% 22.8% 1.5% 49.0%
Savaria Corporation (OTC:SISXF) (TSE:SIS) Toronto Stock Exchange 20.2 3.4 15.4 1301.0% 12.7% 10.6% 7.7% 35.5% 9.6% 33.7%
Schindler Holding AG (OTC:SHNDY) (NASDAQ:SCHN) SIX Swiss Exchange 20.4 6.9 13.9 1198.3% 14.4% 12.7% 10.4% 33.9% 10.7% n/a
Click to enlarge

*ROIC was calculated using the following formula: Trailing 12 months EBIT / (Current Assets - Cash and Cash Equivalents - Current Liabilities + PPE)

As a special bonus for my subscribers, they will get access to the names and profiles the five (5) Asian-listed elevator manufacturers in a separate bonus watchlist article.

Note: Subscribers to my Asia/U.S. Deep-Value Wide-Moat Stocks exclusive research service get full access to the list of wide moat investment candidates and value traps, which include "Magic Formula" stocks, wide moat compounders, hidden champions and high quality businesses, that I have profiled.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.