Otis Earnings: Service and Modernization Strength Offsets Weak Equipment Demand in Late 2023

Our 2023 estimates for Otis Worldwide OTIS are little changed, with the wide-moat stock’s performance tracking largely in line with our expectations. Demand for new elevator equipment remained weak during the quarter. Still, we’ve nudged our full-year EBIT and EPS forecasts up by about 1% each—to USD 2.3 billion and USD 3.52, respectively—with Otis’ service and modernization business continuing to display considerable buoyancy in late 2023. Otis shares screen attractively relative to our unchanged USD 98 fair value estimate.

New equipment sales rose 1.1% on a constant-currency basis, supported by Otis’ still robust order book, which stood at USD 17.6 billion at the end of the third quarter. Still, the near-term outlook for new equipment remains cyclically weak, with equipment orders falling 10% in the third quarter—owing to significant weakness in order intake in China and the Americas. The drop in equipment order intake—the second consecutive quarter of weakened equipment orders—accords with downbeat construction market conditions. Heading into 2024, we expect new equipment conditions to remain weak, with recent increases in interest rates likely to continue to weigh on construction activity near-term.

Heady services top-line growth persisted into the third quarter, growing 8.5% on a constant-currency basis—largely in line with the segment’s performance year to date. Both maintenance and elevator modernization work contributed to the strong third-quarter revenue showing, which tracked ahead of our prior expectations for a second-half modest deceleration in sales growth. Modernization orders continued to grow strongly in the third quarter—rising 13% year on year—speaking to the secular growth opportunity that modernization work represents and which is expected to support further services growth in 2024.