At first glance, the elevator and escalator market may not seem all that interesting. It may also not seem to offer significant potential for investors. However, one company that is in this market that currently demands a hefty trading multiple is Otis Worldwide Corporation (NYSE:OTIS). Fundamentally, performance achieved by the business in recent years, including in the just-announced first quarter of its 2022 fiscal year, has been a little volatile. But on the whole, the overall trend for the business has been encouraging. Even so, shares of the business are trading at levels that suggest significant investor optimism about the enterprise. Some investors may feel like this high multiple is justified, but that's a difficult sell to me. Instead, I do believe that the business is more likely than not fairly priced at this time.
As I mentioned already, Otis Worldwide is dedicated to manufacturing, installing, and servicing elevators and escalators. The company has customers across more than 200 countries and territories worldwide, with about 1,400 branches and offices, and a direct physical presence in no fewer than 80 countries. Previously, the business was combined with United Technologies Corporation, but that ended in March of 2019 when the enterprise was one of two businesses separated from that firm.
Operationally, Otis Worldwide has two segments that it runs. The first of these is the New Equipment segment which, according to the company, designs, produces, sells, and installs passenger and freight elevators, escalators, moving walkways, and more related technologies for residential, commercial, and infrastructure projects. During the company's 2021 fiscal year, this segment accounted for 45% of the company's revenue and about 21% of its profits. The other, larger segment of the company is called Service. As the name suggests, this unit is responsible for performing maintenance and repair services, as well as offering modernization services for the purpose of upgrading elevators and escalators. Today, the company has a maintenance portfolio of more than 2.1 million units across the globe. 55% of its revenue came from the segment, while an impressive 79% of profits were attributable to it.
If you remove the down year experienced during 2020 because of the COVID-19 pandemic, you would see that, on the top line, fundamental performance achieved by the company has been rather positive and improving. Between 2017 and 2019, the company saw revenue climb modestly, rising from $12.32 billion to $13.12 billion. Sales then dropped to $12.76 billion in 2020 before surging to $14.30 billion last year. For 2021, the 12.1% rise in sales came largely as a result of an 8.9% rise in organic volume. However, the company also benefited to the tune of 3% from foreign currency translation and by 0.2% from M&A activities. Perhaps surprisingly, the New Equipment portion of the business fared particularly well, with revenue surging 15.5% year over year. In short, it seems to me as though, as a result of the pandemic, many customers decided to delay purchases of equipment but those delays cannot be made forever. So as the economies across the globe began to reopen, the firm was hit with a temporary surge in demand that should have otherwise taken place one year earlier.
In my introduction to this article, I mentioned that some results have been rather volatile for the company. This was more true from a profitability perspective than it was from a revenue one. For instance, in 2017, the company generated earnings of $636 million. Over the ensuing two years, this metric surged to $1.12 billion before dropping to $906 million in 2020. In 2021, however, profits rose to an astounding $1.25 billion. Operating cash flow, meanwhile, remained in a fairly narrow range of between $1.45 billion and $1.55 billion in the four years ending in 2020. This metric then jumped to $1.75 billion last year. Meanwhile, EBITDA moved in a narrow range of between $2.07 billion and $2.14 billion over the four years ending in 2020. But then, in 2021, EBITDA jumped to $2.35 billion.
So far, financial performance covering the 2022 fiscal year looks to be rather uncertain. Revenue, for instance, did increase for the company, rising from $3.408 billion to $3.414 billion. Unfortunately, however, this was short of expectations analysts provided to the tune of $33.86 million. Net profits also increased, climbing from $308 million to $311 million. Earnings for the quarter totaled $0.73, matching what analysts were anticipating. Other metrics were not so fortunate. Operating cash flow dropped year over year, declining from $585 million to $504 million. Though if we adjust for changes in working capital, the drop was more modest, declining from $417 million to $414 million. Meanwhile, EBITDA for the company dipped from $583 million to $574 million.
For the 2022 fiscal year as a whole, management does anticipate revenue of between $14.1 billion and $14.3 billion. That translates to a year-over-year growth rate of just 0.5% and 1.5%. That would largely be driven by organic revenue growth of between 3% and 4%, with organic service revenue climbing by between 5% and 6%. Meanwhile, earnings per share should be between $3.22 and $3.27 on an adjusted basis. At the midpoint, this implies adjusted net profits of $1.39 billion. Management did say that free cash flow should be around $1.6 billion. But they did not discuss how much the company would be spending on operating cash flow. But if we take the same $156 million spent on capital expenditures last year and apply it to this year, then that implies operating cash flow of around $1.76 billion. Using that same year-over-year growth rate, we should end up with an estimate for EBITDA of around $2.6 billion.
Taking this data, we can easily value the company. Using our 2021 results, the business is trading at a price-to-earnings multiple of 24.9. The price to operating cash flow multiple comes in at 21.8, while the EV to EBITDA multiple should be 15.6. Meanwhile, using the 2022 estimates, these multiples would be 22.4, 19.6, and 15.6, respectively. To put the pricing of the business into perspective, I decided to compare it to five similar firms. On a price-to-earnings basis, these companies ranged from a low of 5.6 to a high of 100.3. In this case, three of the five companies were cheaper than Otis Worldwide. Using the price to operating cash flow approach, the range was from 8 to 26.9. And finally, using the EV to EBITDA approach, we get a range of between 3.9 and 27.4. In both of these cases, four of the five companies were cheaper than our prospect.
|Company||Price / Earnings||Price / Operating Cash Flow||EV / EBITDA|
|Mueller Industries (MLI)||5.6||8.0||3.9|
|Standex International (SXI)||25.4||13.6||12.2|
|Evoqua Water Technologies (AQUA)||100.3||26.9||27.4|
|Snap-on Inc. (SNA)||14.3||14.4||9.8|
Based on all the data provided, it seems to me as though Otis Worldwide is generally a fundamentally attractive company that will likely continue to fare well for the foreseeable future. But just because fundamental performance is attractive does not mean that the business makes for a great prospect at this time. Relative to similar firms, Otis Worldwide looks quite pricey. Plus shares are not exactly cheap on an absolute basis either. At the end of the day, I would make the case that the stock is more or less fairly valued at this point in time. But we will see how the picture changes in the ensuing months and whether that can affect my thought process on the matter.
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This article was written by
Daniel is an avid and active professional investor. He runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein.
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.