We've been asking ourselves recently if the market has placed a fair valuation on Otis Worldwide. Let's dive into some of the fundamental values of this large-cap Technology company to determine if there might be an opportunity here for value-minded investors.
Otis Worldwide's Valuation Is in Line With Its Sector Averages:
Otis Worldwide Corporation engages in the manufacturing, installation, and servicing of elevators and escalators in the United States, China, and internationally. The company belongs to the Technology sector, which has an average price to earnings (P/E) ratio of 35.0. In contrast, Otis Worldwide has a trailing 12 month P/E ratio of 26.3 based on its earnings per share of $3.31.
There is an important limit on the usefulness of P/E ratios. Since the P/E ratio is the share price divided by earnings per share, the ratio is determined partially by market sentiment on the stock. Sometimes a negative sentiment translates to a lower market price and therefore a lower P/E ratio -- and there might be good reasons for this negative sentiment.
One of the main reasons not to blindly invest in a company with a low P/E ratio is that it might have low growth expectations. Low growth correlates with low stock performance, so it's useful to factor growth into the valuation process. One of the easiest ways to do this is to divide the company's P/E ratio by its expected growth rate, which results in the price to earnings growth, or PEG ratio.
Otis Worldwide's PEG ratio is 2.54, which shows that the stock is overvalued in terms of its estimated growth. For reference, a PEG ratio near or below 1 is a potential signal that a company is undervalued.
The Company's Revenues Are Declining:
| 2019 | 2020 | 2021 | 2022 | 2023 | |
|---|---|---|---|---|---|
| Revenue (MM) | $13,118 | $12,756 | $14,298 | $13,685 | $14,028 |
| Revenue Growth | n/a | -2.76% | 12.09% | -4.29% | 2.51% |
| Operating Margins | 14% | 13% | 15% | 15% | 15% |
| Net Margins | 9% | 7% | 9% | 9% | 10% |
| Net Income (MM) | $1,116 | $906 | $1,246 | $1,253 | $1,380 |
| Net Interest Expense (MM) | $18 | -$122 | -$136 | -$143 | -$145 |
| Depreciation & Amort. (MM) | $85 | $191 | $203 | $191 | $191 |
| Earnings Per Share | $2.55 | $2.08 | $2.89 | $2.96 | $3.3 |
| EPS Growth | n/a | -18.43% | 38.94% | 2.42% | 11.49% |
| Diluted Shares (MM) | 433 | 435 | 431 | 423 | 414 |
| Free Cash Flow (MM) | $1,324 | $1,297 | $1,594 | $1,445 | $1,364 |
| Capital Expenditures (MM) | $145 | $183 | $156 | $115 | $130 |
| Current Ratio | 1.05 | 0.97 | 1.32 | 0.9 | 1.0 |
| Total Debt (MM) | $5 | $5,262 | $7,273 | $7,299 | $7,938 |
| Net Debt / EBITDA | -0.76 | 1.9 | 2.47 | 2.75 | 2.69 |
