Otis Worldwide (OTIS) Shares Are Heading Up Today As Investors Shrug Off Mild Q4 Results
3:38 pm Monday, January 31st, 2022
Otis Worldwide (NYSE:OTIS) is heading to a higher floor today on decent Q4 earnings results. The elevator and escalator manufacturer, which Raytheon Tech (RTX) spun off nearly two years ago, squeezed out a slight earnings beat but missed revenue expectations in the quarter. OTIS’s Q4 adjusted EPS beat was the smallest it has posted since being spun off. Also, perhaps most notably, the company’s FY22 guidance was relatively weak.
Investors appear to be shrugging off OTIS’s second straight quarter of mild earnings results. Recall that in Q3, earnings upside and revenue growth were weaker than in the prior quarter as the company navigated inflationary pressures. Unfortunately for OTIS, the situation spilled over into this quarter, as rising commodity and other supply chain costs offset productivity and pricing gains. As a result, adjusted operating margins remained stagnant yr/yr at 14.6%.
However, investors may have already predicted that the company could struggle in Q4, given the current inflationary environment. Soaring supply chain costs have been a central theme thus far in the DecQ earnings season. For example, construction equipment supplier Caterpillar (CAT) saw operating margins decline 600 bps yr/yr in Q4 due to rising freight and material costs. Meanwhile, on the flip side, Steel Dynamics (STLD) just reached record volume and earnings in Q4 from robust steel demand and favorable pricing.
What may be more surprising is that OTIS’s sales grew at their slowest pace in over a year. In Q4, revs jumped just 2.2% yr/yr to $3.57 bln, becoming the company’s first sales miss since being spun off. Sales growth in OTIS’s two segments, New Equipment and Service, grew in-line with the company’s overall sales growth yr/yr.
OTIS’s FY22 guidance was also a weak point in Q4. The midpoint of its earnings guidance of $3.20-3.30 and revenue guidance of $14.4-14.7 bln both fell short of analysts’ predictions. As we saw from CAT regarding China, sales are expected to decelerate during the year. OTIS expects growth in China to range from down low single digits to flat, as new orders are not likely to grow much throughout the year. This outlook echoes CAT’s comments last week noting that the only area in which it expects to see some potential slowdown in 2022 is China.
Although other regions are not expected to fare much better, that forecast is mainly due to unfavorable FY21 comparisons. For example, OTIS is guiding for low single-digit growth in the Americas in FY22, but that region shot up 14% yr/yr in FY21.
Bottom line, FY22 guidance is mostly a reflection of OTIS returning to a more normalized pace of growth of around 4%. FY21 was more of a recovery year as sales leaped 12.1% yr/yr.
That is not to say that OTIS is still not a strong choice for exposure to the global commercial construction markets. OTIS is the largest elevator and escalator manufacturing company in the world, giving it the foundation to weather many ups and downs in the market. Also, CAT noted that nonresidential construction is still recovering in regions outside China, building in the potential for OTIS to outperform its current FY22 guidance as the year progresses. Lastly, the stock carries a 1.2% dividend yield, and management bought back a respectable ~2% of shares outstanding in FY21. All in all, we remain bullish on OTIS as a solid long-term investment.
