Otis Worldwide Q2 Preview: Anticipating Weak Sales Amidst China Growth Slowdown

Otis Worldwide Corporation's Q2 preview is expected to show weak equipment sales due to the decelerated revenue growth caused by the weak real estate market in China. As a result, I previously assigned a Sell rating to the company in October 2023.

Otis Worldwide Corporation (NYSE:OTIS) is expected to report weak equipment sales in its Q2 FY25 preview, due to the ongoing decelerated revenue growth driven by the sluggish real estate market, particularly in China. The company had previously experienced negative year-over-year growth in new equipment sales over the past six quarters, primarily due to weak demand in China and slow housing markets in developed countries [1].

The slowdown in China's real estate market has been a significant factor, with Otis reporting a 20% decline in organic equipment sales in Q1 FY25. The company has attributed this to the recession in China's real estate market and falling property prices [1]. Additionally, the U.S. housing market has shown weakness, with housing starts remaining low due to high mortgage rates [1].

Otis is projecting 2%-4% revenue growth and 4%-7% adjusted EPS growth for the full year, with new equipment sales expected to decline by 1%-4% [1]. The company's outlook for the Chinese market remains cautious, with management anticipating gradual stabilization later this year. However, the current U.S.-China tariff uncertainties may pose further challenges [1].

Looking ahead, the company is expected to continue its focus on its service business, which has shown strong organic revenue growth in modernization and maintenance services. Otis is also planning to raise prices and improve productivity to offset tariffs and other rising costs [1].

Despite these challenges, the company's fair value is estimated to be $82 per share, based on a discounted cash flow (DCF) analysis. The DCF analysis considers a weighted average cost of capital (WACC) of 9.3%, with a terminal growth rate of 4% [1].

In summary, Otis Worldwide Corporation's Q2 preview is expected to highlight weak equipment sales amidst a slow real estate market, particularly in China. The company's outlook remains cautious, with a focus on its service business and cost management strategies. Investors should closely monitor the company's performance and the broader economic conditions that may impact its growth prospects.

References:
[1] https://seekingalpha.com/article/4800462-otis-worldwide-q2-preview-anticipating-weak-equipment-sales