A month has gone by since the last earnings report for Otis Worldwide (OTIS). Shares have added about 6.4% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Otis Worldwide due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Otis reported impressive results in fourth-quarter 2023. Its earnings and net sales surpassed the Zacks Consensus Estimate and grew on a year-over-year basis. Its quarterly results reflected 13 consecutive quarters of organic sales growth, and the results were marked by a mid-teens growth in adjusted earnings per share (EPS), the third consecutive quarter of high-single-digit organic sales growth in the Service segment, and a resurgence in New Equipment orders growth.
Full year 2023 also registered a notable mid-single-digit increase in organic sales, coupled with an expansion in operating profit margin and a robust low-teens growth in adjusted EPS.
The company reported quarterly earnings of 87 cents per share, surpassing the consensus estimate of 85 cents by 2.4% and increasing 16% from the year-ago quarter’s figure of 75 cents. The upside was mainly driven by operational improvement, a lower share count and effective tax rate improvement.
Net sales of $3.62 billion topped the consensus mark of $3.56 million by 1.3% and rose 5.3% on a year-over-year basis. Organically, net sales rose 3.8% year over year for the quarter. Currency fluctuations benefited sales by 1.4%.
Adjusted operating margin expanded 90 basis points (bps) to 15.6% from the year-ago period’s level, backed by the segments’ favorable performance and mix.
New Equipment’s net sales of $1.47 billion grew 0.3%, but adjusted net sales edged down by 0.1% from the prior-year period. A 0.2% meager drop in organic sales was due to the decline in China, which partially offset growth in the Americas and Asia Pacific. Foreign exchange benefited sales modestly.
New Equipment orders were up 3% at constant currency. This growth was propelled by double-digit expansion in EMEA, single-digit growth in the Americas, and modest single-digit growth in Asia Pacific. However, these positive trends were tempered by single-digit declines in China.
The New Equipment’s backlog at constant currency as well as on a GAAP basis increased 2% year over year.
Adjusted operating margin was up 120 bps year over year at 6.1%.
Service’s net sales increased 8.9% to $2.15 billion. A 6.8% rise in organic sales and a 1.9% benefit from foreign exchange helped the top line. Organic maintenance and repair sales grew 6.8% and organic modernization sales rose 7% from the prior-year quarter.
Modernization orders were up 11% at constant currency during the reported quarter. Modernization backlog at constant currency increased 15% year over year.
Adjusted operating margin registered an improvement of 10 bps year over year to 24%, driven by higher volume, favorable pricing and productivity, partially offset by labor inflation and higher material costs.
Adjusted earnings came in at $3.54 per share, reflecting an increase of 11.7% from $3.17. Net sales grew 3.8% to $14.2 billion. Organic sales registered a 5.6% uptick, slightly mitigated by a 1.2% headwind from foreign exchange.
The adjusted operating margin saw a 30-bps expansion, driven by robust performance in the Service segment and a favorable mix. However, this was partially offset by challenges in the corporate sector.
Segment-wise, New Equipment net sales decreased 0.9%, with a 2.6% increase in organic sales partially offset by a 2.1% headwind from foreign exchange. Service’s net sales rose by 7.4%, fueled by a 7.7% surge in organic sales. However, this growth was slightly tempered by a 0.4% headwind from foreign exchange.
Otis had cash and cash equivalents of $1.27 billion as of Dec 31, 2023. This compares favorably with the 2022-end figure of $1.19 billion. Long-term debt was $6.87 billion as of Dec 31, 2023, up from $6.1 billion at 2022-end.
Net cash flows provided by operating activities were $597 million for the December quarter, up from $464 million a year ago. In 2023, the metric rose 4.3% year over year to $1.63 billion.
Adjusted free cash flow (FCF) totaled $573 million for the quarter, up from $430 million a year ago. In 2023, FCF was 1.53 billion, up from $1.46 billion in 2022.
For 2024, the company expects net sales to be nearly $14.5-$14.8 billion. The new projection indicates approximately 2-4% growth. Organic sales growth is projected to be 3-5% (flat for New Equipment and up 6-7% for Service).
Adjusted operating profit is projected to be up $150-$190 million at constant currency. Adjusted EPS is anticipated to be $3.80-$3.90. The updated outlook suggests 7-10% year-over-year growth.
Adjusted FCF is expected to be $1.6 billion.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended downward during the past month.
VGM Scores
At this time, Otis Worldwide has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. Notably, Otis Worldwide has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
Performance of an Industry Player
Otis Worldwide belongs to the Zacks Building Products - Miscellaneous industry. Another stock from the same industry, United Rentals (URI), has gained 7.4% over the past month. More than a month has passed since the company reported results for the quarter ended December 2023.
United Rentals reported revenues of $3.73 billion in the last reported quarter, representing a year-over-year change of +13.1%. EPS of $11.26 for the same period compares with $9.74 a year ago.
United Rentals is expected to post earnings of $8.32 per share for the current quarter, representing a year-over-year change of +4.7%. Over the last 30 days, the Zacks Consensus Estimate has changed 0%.
United Rentals has a Zacks Rank #3 (Hold) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of B.
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