Otis Worldwide

Otis grew service sales 9% organically in the second quarter, the strongest pace since the 2020 spinoff, but margin pressure in that segment pushed management to cut 2026 adjusted EPS guidance to $4.01-$4.05.

Why it matters: Service drives most of Otis’ value. Strong repair and modernization demand supports the long-term thesis, but weaker retention, cost inflation, and slower mechanic productivity put more pressure on second-half margin recovery. Modernization grew 24% and repairs by 12%, while new equipment backlog rose 4% at constant currency, or 9% excluding China.

The bottom line: We maintain our wide moat rating and $105 fair value estimate. Shares look undervalued. We believe the market overweights near-term cost and retention noise versus the structural growth opportunity in modernization and service.

Coming up: We will test management’s 150-basis-point second-half service margin recovery bridge, driven by repair pricing, volume leverage, and lower selling, general, and administrative expenses, and watch whether retention stabilizes as pricing is tempered.

Bears say: Retention turned negative in the Americas, and $70 million of incremental cost headwinds mark a second straight guidance miss. If this persists into 2027, management's promised 40 basis points to 60 basis points of annual margin expansion gets harder to defend.

Our fair value estimate for Otis is $105, which is supported by mid-single-digit revenue growth and continued margin expansion.

Otis’ outsize exposure to the US market relative to peers gives it an attractive runway for multiyear profitable modernization and maintenance revenue growth. For the five-year period up to 2030, we forecast 7% annual top-line growth for its service business, while we model a slight decline in the new installation business.

The continued mix shift to the profitable service business should continue to elevate the group margin from 16.9% in 2025 to 18.7% by 2030. Additionally, Otis has done a very good job extracting efficiencies since its spinoff in 2020. The group believes it can achieve 0.5% per year margin gains over the medium term—we apply a greater degree of caution than management, as we believe the magnitude of the departure from the rest of the industry’s margin structure to be too great and unmaintainable over the long term.

These assumptions translate into 10% per year EBIT growth over the forecast period and a 65% increase in free cash flow to $2.4 billion by 2030. In stage two of our model, we apply a 4% annual growth rate over the 15-year period and discount cash flows using a WACC of 6.5%.

We assign Otis a wide economic moat rating based on its intangible assets (trusted brand and track record) and the switching costs inherent in its service business. These advantages allow Otis to achieve durable economic profits in a structurally consolidated, mature, and capital-light industry.

The elevator and escalator industry is a highly consolidated oligopoly, with Otis, Schindler, Kone, and TK Elevator holding approximately 70% of the global new equipment market. While service is more fragmented, especially in emerging markets, OEMs capture greater value share by servicing high-rise and complex buildings beyond most independent service providers' capabilities. This structure fosters rational pricing and durable excess returns.

Major OEMs employ capital-light business models, outsourcing roughly 70%-75% of production while focusing internally on engineering, integration, and aftermarket services. This produces negative working capital, strong cash generation through downturns, and flexibility to adjust costs. Consequently, Otis and its peers consistently deliver high, stable returns on invested capital well above their cost of capital.

Given elevators are mission-critical infrastructure, especially in dense urban areas, an OEM's brand and safety record are paramount in new equipment and service purchasing. These intangible assets build trust, lower perceived customer risk, and create barriers against lesser-known or lower-cost competitors. Brand equity and history are especially important in new installations, where OEMs must assure developers and regulators of long-term safe and reliable operation. Third-party installers and service providers also favor established brands like Otis, as large installed bases improve route density economics. Inventory requirements and staff training make supporting many brands impractical, creating a soft entry barrier. Although core electromechanical technologies are mature, OEMs continue to innovate in energy efficiency, digital integration, and ease of installation, reinforcing brand value and customer loyalty.

High switching costs in the service business (maintenance and modernization) are another moat source. Service generates steady recurring revenue, higher margins (in the high teens), and substantial customer lock-in, accounting for approximately 60% of major OEMs' revenue and nearly 90% of operating profits. Although unit share is roughly 50/50 OEM versus independent service provider globally, OEMs capture much higher value share by servicing more high-rise, nonresidential, and complex multiproperty portfolios with greater add-on service and uptime guarantees. Independent providers tend to service older, low-rise residential properties, where customers are more cost-conscious and require only basic service.

OEMs increasingly offer predictive maintenance, remote diagnostics, and performance analytics, reducing downtime, improving traffic flow, lowering ownership costs, and enhancing stickiness. Only 25%-35% of the global installed base is digitally connected, leaving significant growth potential. Digitalization also raises the difficulty and cost of switching to an independent provider, which typically lacks access to proprietary software and systems. OEMs have observed 5% higher retention rates and 10% higher conversion rates on digitally integrated properties.

Many service contracts are multiyear (two to four years) with inflation-linked escalation clauses, protecting margins and returns during inflationary periods. Global annual renewal rates exceed 90% and are higher in mature markets. As service portfolios and digitalization expand, Otis' and other OEMs' data advantage compounds, improving insights into failure patterns, usage cycles, and predictive diagnostics and supporting better maintenance and innovation.

Beyond routine service, modernization strengthens the moat. Of a global installed base of approximately 25 million units growing at a mid-single-digit rate annually, around 10 million (over 60%) are older than 15 years, the typical upgrade age. This creates a significant modernization opportunity expected to grow at a high-single-digit rate long term. Modernization can deliver energy savings of up to 70% versus decade-old models, improve building efficiency through digitalization, and is often required by new safety regulations. Crucially, it enables OEMs to recapture units previously serviced by independent providers, increasing recurring revenue and extending customer lock-in.

While major OEMs have relatively undifferentiated core technology and business models, geographic exposure differs. China represents 40% of the global installed base and over half of new equipment sales by units. The US and Europe are mature markets, with the US skewing nonresidential and Europe primarily residential. The US service market is more consolidated (70% OEM share) than Europe (50%), while service revenue accounts for 70% of industry sales in both regions but only around 30% in China. As China matures, its service segment should grow and consolidate, a trend already accelerated by regulatory changes.

Otis boasts industry-leading returns and margins, largely due to favorable geographic exposure. With 30% of sales from the US and relatively lower emerging-market exposure, its revenue mix is tilted toward more mature, rational, and profitable markets than peers.

Otis has the largest installed base globally, which provides a steady and predictable stream of cash flows.

Ongoing digitalization enhances switching costs and margin expansion within the service business.

An aging global installed base, especially in Europe and North America, where Otis enjoys a leading position, offers a long-term structural tailwind for modernization demand.

The global new installation market may prove to be a greater headwind than anticipated.

Consolidation among independent service providers in key markets may increase competition in the lucrative service business.

Rising protectionism and global supply chain disruptions could increase costs and disrupt the industry’s intricate supply chain, pressuring margins.