Over the past six months, Otis’s shares (currently trading at $77.13) have posted a disappointing 15% loss, well below the S&P 500’s 6.4% gain. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Otis, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think Otis Will Underperform?
Even with the cheaper entry price, we don't have much confidence in Otis. Here are three reasons why OTIS doesn't excite us and a stock we'd rather own.
1. Core Business Falling Behind as Demand Plateaus
In addition to reported revenue, organic revenue is a useful data point for analyzing General Industrial Machinery companies. This metric gives visibility into Otis’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.
Over the last two years, Otis failed to grow its organic revenue. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests Otis might have to lean into acquisitions to accelerate growth, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus). 
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Otis’s revenue to rise by 4.4%. Although this projection suggests its newer products and services will catalyze better top-line performance, it is still below the sector average.
3. Recent EPS Growth Below Our Standards
While long-term earnings trends give us the big picture, we also track EPS over a shorter period because it can provide insight into an emerging theme or development for the business.
Otis’s EPS grew at an unimpressive 5.4% compounded annual growth rate over the last two years. On the bright side, this performance was higher than its 1.2% annualized revenue growth and tells us the company became more profitable on a per-share basis as it expanded.
Final Judgment
Otis falls short of our quality standards. Following the recent decline, the stock trades at 18.3× forward P/E (or $77.13 per share). This valuation tells us a lot of optimism is priced in - we think other companies feature superior fundamentals at the moment. Let us point you toward a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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