Otis: Service Business Builds Evergreen Moat, Maintains Outperform Rating

Overview

This research report is a briefing released by Bernstein following the Otis management webcast, primarily addressing investor concerns about whether the company would downsize 2026 performance guidance. The institution believes that despite macro challenges, Otis revenue performance met expectations, with the service business (especially modernization and maintenance) providing strong structural support. Based on a 14x EV/EBITDA valuation, the institution maintains the $97 target price and Outperform rating, emphasizing that the risk-reward ratio is attractive at current stock prices.

Core views

Performance Guidance and Short-Term Outlook: Regarding the market's primary concern about 2026 Q2 earnings, management explicitly stated revenue would show no surprises, maintaining the tone of the previous quarter's guidance. Bernstein judges a high probability of meeting revenue targets but adopts a cautious stance on margin expansion, expecting only 10-20 basis points YoY improvement, translating to approx $1.0 EPS for Q2, consistent with market consensus. Although pricing initiatives are expected to contribute $50 million in profit by year-end, these gains will be offset by equivalent investment in frontline technicians, parts, and digital tools, limiting near-term net profit growth. Structural Growth in Service Business: Modernization is viewed as 'evergreen' demand; out of 22 million elevators globally, 9 million are over 20 years old, and clearing the existing order backlog requires 20 years, providing a foundation for visible mid-to-high double-digit growth. Maintenance benefits from equipment aging, expected to grow at high single digits or above 10%, representing the highest margin among the three service sub-sectors. Warranty business growth is low single digits (approx 3%) due to legal mandates, ensuring high predictability. While management's focus on high-profit markets caused base growth to slow slightly, overall stability remains extremely strong. Digital Moat and Competitive Landscape: Addressing concerns over Independent Service Providers (ISPs), management noted ISPs are not new and concentrate in specific regions rather than national scale. The true moat lies in data—new installs and most retrofits come pre-loaded with the Otis ONE system, giving the OEM access to fault information and predictive analytics unavailable to ISPs. Currently, only approx half of Otis's installed base is 'connected'; as modernization progresses, improved penetration will significantly enhance customer retention and service efficiency. A Poland market case demonstrated that high connectivity yields higher retention and lower costs, a trend expected to replicate globally. Regional Markets and External Opportunities: The China market remains in decline, but the drop is expected to narrow from -13% last year to -8% this year as government stimulus transmits; service revenue growth could become a market inflection point. North America remains robust, while Southern Europe and Asia ex-China performed well. Additionally, the KONE/TKE merger presents a short-term opportunity; integration-related layoffs may drive talent outflow, and Otis is actively preparing to absorb quality supervisors and technicians, remaining open to asset acquisitions under matching price and strategic conditions.

Analysis framework

The institution adopted a bottom-up fundamental decomposition approach, explicitly dividing the company's business into two major segments: New Equipment and Services, and further breaking down services into three sub-categories: Modernization, Maintenance, and Warranty for independent driver analysis. For each sub-business, the institution analyzed not only revenue growth rates but also qualitative factors such as the age structure of the installed base, legal mandatory attributes, and margin differences to assess the sustainability of growth and quality of earnings. In analyzing competitive barriers, the institution moved beyond the traditional market share perspective, adopting a 'data assets + switching costs' framework. By contrasting differences in proprietary platform access between OEMs and ISPs, it argued that digital connectivity rate is the core variable determining long-term retention rates and pricing power, rather than simple price competition. On the valuation front, an EV/EBITDA multiple approach was used, selecting NTM+1 EBITDA as the benchmark to smooth short-term investment volatility, combined with the industry cycle position to assign a 14x target multiple. This approach reflects the institution's view that the company is transitioning from a capital investment phase to a profit release phase, where forward earnings capability better reflects intrinsic value.

Methodology notes

• Valuation MethodEV/EBITDA valuation

  Use enterprise value multiple to value asset-heavy, high depreciation and amortization service industrial enterprises

  Research report uses 14x target EV/EBITDA multiplied by NTM+1 EBITDA to derive target price. Compared to PE valuation, EV/EBITDA removes impact of capital structure, tax policies and depreciation/amortization differences, more suitable for assessing transnational industrial service companies like Otis which are in transformation investment period and have significant differences in asset depreciation policies across regions; selecting NTM+1 (next 12 months + subsequent year) data is to avoid disruption of current one-off investment on profits.

• Competition and Strategic FrameworkMoat / competitive advantage

  Customer lock-in effect and service efficiency advantage built based on proprietary data platforms

  Research report did not simply measure competitiveness using market share, but pointed out Otis ONE system low penetration implies huge existing stock conversion space. When elevator connects to proprietary IoT platform, original manufacturer can obtain real-time fault data ISPs cannot access, achieving predictive maintenance and increasing customer switching costs. This 'Data is Moat' logic explains why even if ISPs occupy 55% global share, OEMs can still hold high-value contracts and gradually improve retention rates.

• Industry / Industrial Analysis FrameworkSupply-demand framework

  Long-cycle analysis of modernization and maintenance demand driven by aging stock equipment

  Research report anchors service business growth on the supply-side hard constraint of 'global 9 million units of elevators over 20 years old', rather than short-term macroeconomic fluctuations. Since elevator renewal has semi-autonomous selectivity and project duration spans large (e.g., London subway project over 5 years), this demand pool based on physical lifespan provides company with 20-year revenue visibility, making 'evergreen' growth logic independent of new elevator sales cyclical fluctuations.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Otis Worldwide Corp (OTIS.US)

  Core Beneficiary: Service business structural growth, deepening digital moat and short-term opportunities brought by competitor consolidation jointly support valuation recovery

  Strengths

  One of world largest elevator service bases; Otis ONE proprietary platform builds data barrier; Modernization demand provides 20-year revenue visibility; Management focus high-profit market strategy clear

  Weaknesses

  China new elevator market continuous shrinkage drags overall growth; 2026 margin expansion suppressed by frontline investment; ISP still occupies higher share in some regions

  Comparison

  Compared to KONE/TKE integration pain period post-merger, Otis operation more stable and digital penetration leading; Compared to pure ISP service providers, own OEM data and full lifecycle service capability

  Risks

  Other OEM competition intensifies in modernization field; China service strategy implementation lags expectations; ISP risks materialize substantively in maintenance and repair fields

Key data

• Target Price97.00 USDBased on 14x EV/EBITDA and NTM+1 EBITDA $3.1 billion calculation, implying 35% upside
• 2026E Adjusted EPS4.18 USDYoY growth approx 3%, 2027 expected accelerate to $4.83
• 2026E Revenue$15.105 BillionIncluding service business revenue $10.168 Billion, ratio approx 67%
• Service Business EBIT Margin25.1%2026 expected flat, 2027 increased to 26.1%
• China New Elevator Sales Decline-8%Significantly narrowed compared to 2025's -13%, showing market stabilizing signs
• Pricing Initiatives Profit Contribution$50 MillionExpected to be implemented in H2 2026, but offset by equivalent frontline investment scale

Impact & implications

Research report considers Otis is in critical verification period transforming from new elevator dependency to service-driven. If modernization and maintenance business can continuously deliver high-mid double-digit growth, and Otis ONE connection rate improvement drives retention improvement, company expected to achieve twice industry growth rate in future five years. For investors, current stock price has fully reflected pessimistic expectations of China market, while service business structural resilience and operational leverage brought by digitalization not yet fully priced. KONE/TKE merger induced industry friction also provides Otis window period for low-cost acquisition of talent and assets, if executed properly will further consolidate its global service network density advantage.

Risks

• Intensifying competition from other OEMs in modernization business
• Slowing speed of service strategy promotion in China market
• ISP risks materializing, especially in maintenance and repair fields

What to watch

• Whether Q2 2026 revenue sees no surprises as management guidance
• Otis ONE connection rate improvement progress and actual impact on retention rate
• Whether China new elevator sales decline continues narrowing in H2
• Talent flow and potential asset sale opportunities after KONE/TKE merger
• Profit realization situation of pricing transformation in H2 2026