Over the past six months, Otis’s shares (currently trading at $66.84) have posted a disappointing 15.4% loss, well below the S&P 500’s 16.2% gain. This might have investors contemplating their next move.
Is now the time to buy Otis, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think Otis Will Underperform?
Despite the more favorable entry price, we’re cautious about Otis. Here are three reasons you should be careful with OTIS, plus one stock we’d rather own.
1. Slow Organic Growth Suggests Waning Demand In Core Business
We can better understand General Industrial Machinery companies by analyzing their organic revenue. 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’s organic revenue averaged 1.4% year-on-year growth. This performance was underwhelming and suggests it may need to improve its products, pricing, or go-to-market strategy, which can add an extra layer of complexity to its operations. 
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 4.3%. Although this projection indicates its newer products and services will spur better top-line performance, it is still below the sector average.
3. EPS Barely Growing
Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable — for example, revenue could be inflated through excessive spending on advertising and promotions.
Otis’s EPS grew at 6.8% compounded annual growth rate over the last five years. On the bright side, this performance was better than its 1.6% annualized revenue growth and tells us the company became more profitable on a per-share basis as it expanded.
Final Judgment
We see the value of companies helping their customers, but in the case of Otis, we’re out. After the recent drawdown, the stock trades at 16.2× forward P/E (or $66.84 per share). At this valuation, there’s a lot of good news priced in - we think there are better opportunities elsewhere. Let us point you toward the Amazon and PayPal of Latin America.
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