We expect OTIS shares to generate an IRR of 10-13% with less than market risk and limited downside.
OTIS has proven itself to be resilient and defensive with significant improvements over the past 2-3 years after splitting from UTX in 2020.
The conclusion we have reached is that digitisation, especially IoT, benefits the incumbent. In this case Otis can offer a better service vs independents, and will hence retain a larger portion of service contracts.
We think this is a critical piece of the puzzle. Otis lost share in servicing to independents in the past, digital gives them a strategic advantage in retaining service contracts that is likely to last for a long time.
Benefits are win-win: The customer sees fewer breakdowns, better service response times. While Otis sees higher service win rates, lower churn and more efficient use of its technicians, enabling margin expansion.
IRR summary:
Services growth of ~6%.
Operating margin expansion of 50bps, fading to 20-30bps in four years.
Share reduction of ~2%-2.5% per year
Gives EPS growth of 10-12% for the next few years, fading to ~9-10%.
Plus a dividend yield of 1.67%.
Comments