Kone's Mixed Earnings and the Long Game: Can Modernization Justify the Valuation?

Kone Corporation's Q2 2025 earnings report paints a familiar picture of resilience in the face of adversity. The Finnish engineering giant reported a 6.1% year-over-year increase in net income to €276.9 million and a 3.7% rise in adjusted EBIT to €347.2 million, despite a 0.5% decline in orders and a softening New Building Solutions (NBS) market in China. While these figures suggest operational stability, the broader question remains: Can Kone's long-term modernization strategy offset near-term headwinds and justify its current valuation?

A Dual-Track Strategy: Modernization vs. New Construction

Kone's revised revenue guidance of 2–5% growth at comparable exchange rates for 2025 reflects its pivot toward Service and Modernization segments, which have outperformed expectations. Service sales grew nearly 10%, while Modernization sales surged by 20%, driven by demand for retrofitting aging infrastructure and energy-efficient upgrades. These segments now operate at EBIT margins of 25–30%, far outpacing the 10–15% margins of new equipment sales.

The strategic shift is not arbitrary. With nearly 10 million elevators and escalators globally needing modernization, Kone's focus on high-margin, recurring revenue aligns with a structural trend. The company's KONE DX platform, which uses remote monitoring and predictive maintenance, has boosted customer satisfaction and operational efficiency, while regenerative drives in 60% of deliveries cut energy consumption by 20–40%. These innovations not only strengthen margins but also position Kone as a sustainability leader—a critical differentiator in an era of carbon taxes and green regulations.

Valuation Metrics: A Tale of Two Markets

Kone's current P/E ratio of 30.24, above the 27.0 industry median for industrial products, raises questions about whether the market is overpaying for its strategy. By comparison, peers like Otis (P/E 24.14) and Schindler (31.14) trade at narrower spreads. Yet Kone's enterprise value to EBITDA of 16.8x and its €33.75 billion market cap reflect investor confidence in its ability to generate consistent cash flows from service contracts and modernization.

The key to valuation justification lies in margin expansion and market capture. Kone's adjusted EBIT margin of 12.2% in Q2 2025, up from 10.2% in Q1 2024, suggests progress. However, the decline in China's NBS market—a 10% drag on global new equipment sales—remains a wildcard. The company's 2025 guidance assumes a 50% reduction in carbon emissions by 2030, a target that could attract ESG-focused capital, but execution risks persist in scaling digital tools and maintaining service quality.

Strategic Resilience: Can Modernization Outpace Headwinds?

Kone's “Rise” strategy (2025–2030) hinges on three pillars: digital acceleration, sustainability leadership, and a shift from one-time sales to recurring revenue. The company's 38% connectivity rate in its maintenance base and the 30% order growth for its Monospace DX upgrade package demonstrate tangible progress. However, scaling these initiatives in 30 countries while managing supply chain bottlenecks and labor costs will test its operational agility.

The broader context is equally critical. Urbanization and decarbonization are tailwinds for modernization, but geopolitical uncertainties—such as U.S.-China trade tensions and European energy policy shifts—could disrupt demand. Kone's strong order book (€4.7 billion in H1 2025 orders) and €487 million operating cash flow in Q1 2025 provide a buffer, but investors must weigh these against the company's exposure to cyclical construction markets.

Investment Implications: A Calculated Bet

For long-term investors, Kone represents a hybrid opportunity: a mature industrial company with a forward-looking strategy. Its P/E premium is justified by the durability of service and modernization margins, but near-term risks—particularly in China—warrant caution. The company's 2025 targets (2–5% sales growth, 11.8–12.4% EBIT margin) are achievable, but execution will determine whether the valuation holds.

A prudent approach would involve monitoring Kone's ability to convert modernization orders into cash flow and its progress on carbon-neutral manufacturing. For now, the stock offers a compelling mix of defensive qualities (high service margins, strong cash flow) and growth potential (sustainability-driven innovation). However, those seeking rapid earnings growth may find the company's measured pace underwhelming.

Conclusion

Kone's mixed earnings underscore the fragility of its new equipment business but highlight the strength of its modernization pivot. While the current valuation reflects optimism about its long-term trajectory, it also demands that the company deliver on its digital and sustainability promises. For investors with a 3–5 year horizon, Kone's blend of innovation, margin resilience, and ESG alignment makes it a worthy contender—but not without vigilance.