Otis Worldwide

The April 2020 spin-off of Otis Worldwide — $OTIS ( ▼ 0.53% ) from its former parent, United Technologies, was not merely a financial transaction; it was an act of liberation. This move uncaged a 170-year-old, high-quality, high-ROIC service business from a complex and cyclical industrial conglomerate. For the first time in 44 years, investors can own a pure-play, focused compounder that invented its industry.

Otis's legacy, which began in 1853 with Elisha Otis’s invention of the "safety elevator," is more than historical trivia. This 170-year association with safety, reliability, and innovation forms the bedrock of its brand—a powerful and enduring intangible asset.

Today, the "new" Otis is the world's largest manufacturer and maintainer of vertical transportation systems. Since its 2020 re-listing, the company has rejoined the Fortune 500 and embarked on a focused strategy. This strategy leverages digital innovation, such as its Gen3™ and Gen360™ digitally native elevator platforms, and a disciplined, shareholder-friendly capital allocation program.

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The global elevator and escalator industry is a rational oligopoly, dominated by four main players known as the "Big 4": Otis (US), Schindler (Switzerland), KONE (Finland), and TK Elevator (Germany). The business model for this oligopoly is a classic "razor-and-blade" structure. Otis's operations are classified into two distinct segments: New Equipment and Service.

The New Equipment (NE) segment designs, manufactures, and installs passenger and freight elevators, escalators, and moving walkways.6 A superficial analysis of this segment is highly critical. It is cyclical, tied to new construction, and generates extremely low margins. For example, in the third quarter of 2025, the NE segment's operating margin was just 4.7% , and in Q4 2024, it was 4.7%.

However, viewing this segment as a standalone profit center is a critical error. The NE segment is a customer acquisition mechanism. Its primary economic purpose is to "seed" the installed base, with each new elevator sold representing a potential 20-plus-year service contract. Therefore, the key metric for this segment is not its margin, but its ability to convert new installations into the high-margin service portfolio.

The Service segment is the true heart of Otis Worldwide. This division provides maintenance and repair services, as well as modernization services to upgrade existing elevators and escalators. This is a high-margin, sticky, recurring-revenue business that generates the vast majority of the company's profits.

The financial disparity between the segments is stark and reveals the true nature of the business. For the full year 2024, the Service segment represented approximately 60% of total company sales 6 but generated over 90% of the company's total operating profit.

This segment's profitability is exceptional, with operating margins of 24.5% in the fourth quarter of 2024 and 25.5% in the third quarter of 2025. The Service segment itself is comprised of two distinct revenue streams:

The following table visualizes the "razor-and-blade" model using full-year 2024 financials. It demonstrates conclusively that Otis is a service company that uses low-margin equipment sales to fuel its high-margin, durable service engine.

Source: Derived from 2024 Annual Report & Earnings Data

Otis's economic moat is built on the foundation of its industry-largest maintenance portfolio of approximately 2.4 million units. This massive installed base is not static; it is growing at a robust 4.2% (as of year-end 2024), demonstrating the flywheel is functioning effectively. This scale provides an unparalleled service density. With 44,000 field professionals, Otis can service a dense urban area with greater efficiency (e.g., less travel time between jobs) than a smaller competitor, creating a durable, structural cost advantage.

This installed base is protected by formidable switching costs, which are both technical and psychological.

The health of this moat can be quantified by two key performance indicators:

The moat is not invincible. The most significant long-term threat comes from the rise of competent Independent Service Providers (ISPs).20 ISPs attack the "Big 4" by offering lower prices (often by using non-union labor) and championing "open-source" non-proprietary equipment. The fact that analysts on recent earnings calls have asked about recovering retention rates suggests this is a tangible pressure point.

Otis's defense against this threat is not to compete on price, but to reinforce its switching costs through technology. This is the true strategic purpose of its digital transformation. The Otis ONE Internet of Things (IoT) platform is not a gimmick; it is a moat-reinforcement tool. It connects elevators to the cloud, enabling predictive maintenance and real-time status updates.

This strategy is working. The 2024 Investor Day presentation provided the critical evidence: In China, elevator units connected to the Otis ONE platform have a retention rate that is more than 10 percentage points higher than non-connected units. The 2.4-million-unit physical base is the old moat; the new, more powerful moat is the proprietary data network connecting those units, which creates a new switching cost that an ISP cannot replicate.

Otis's growth is supported by durable, long-term secular trends. Continued global urbanization leads to denser, taller cities, which structurally require more vertical transportation systems. Simultaneously, an aging population in developed nations is fueling the "aging in place" trend, increasing demand for accessibility and residential elevators. These trends provide a stable, GDP-plus tailwind for the entire industry.

While New Equipment faces cyclical headwinds from the construction slowdown in China, the real growth story for Otis is in Modernization. The global installed base of elevators is aging, and the opportunity to upgrade these systems is massive. The number of units globally considered "ready for modernization" is projected to increase from 8 million to over 10 million by 2030.

Otis is capitalizing on this "super-cycle." The financial results show a dramatic acceleration:

This modernization boom is more than just a one-time sales boost; it represents a "second-life" for the company's razor-and-blade flywheel. A critical, and easily missed, disclosure from the 2024 annual report states that "modernization margins surpassed New Equipment margins".

This is a game-changer. The old model was:

The new "super-cycle" model is:

This creates a recurring "echo" of profit, re-starting the compounding clock. Furthermore, modernization also serves as an offensive weapon. In Japan, Otis grew its conversion rate of off-portfolio modernizations (i.e., stealing a competitor's unit) from ~5% to ~20%, proving it can use modernization to actively poach and grow its installed base.

For YAINers, the single most important metric is ROCE, and Otis's performance is exceptional. We can estimate Otis ROCE at 66.3% Crucially, Otis is not just good; it is the best in its class. Its ROCE is dominant compared to its main rivals.

A superficial glance at Otis's balance sheet might cause alarm: it shows a negative Total Shareholders' Equity of -$4.85 billion as of year-end 2024. However, this is a feature of its capital efficiency, not a bug of distress.

This negative equity is an accounting artifact of Otis's aggressive and shareholder-friendly capital return program. Since its 2020 spin-off, the company has returned $5.6 billion to shareholders. This is primarily accomplished through massive share repurchases ($1.0 billion in 2024 alone). These buybacks are debited from equity and recorded as "Treasury Stock," which had a balance of $3.39 billion at year-end 2024. When a company's repurchases (a use of cash) consistently exceed its net income (a source of equity), the book value of equity eventually turns negative. This is a sign of a management team's confidence in its durable cash flows.

The balance sheet itself is very healthy.

A leverage ratio of ~2.4x is very conservative for a business with such stable, subscription-like, recurring cash flows, and it supports the company's investment-grade 'BBB' credit rating.

Otis's management team operates a clear, disciplined, and "shareholder-friendly" capital allocation strategy.

The strategy is threefold: (1) pay a growing dividend, (2) aggressively repurchase shares, and (3) make smart, "bolt-on" acquisitions.

Otis is a dividend-growth story. Management's confidence in future cash flow is signaled by its rapid dividend increases:

The dividend is well-covered and safe, with a payout ratio of approximately 47%.

Otis is a voracious cannibal of its own stock. The company spent $1.0 billion on repurchases in 2024. In January 2025, the Board authorized a new $2.0 billion share repurchase program, signaling this aggressive pace will continue.

This capital allocation strategy is the key to Otis's "compounder" formula. Management has guided to a medium-term outlook of over 10% annualized adjusted EPS growth. This is how a company with "low to mid-single digit" organic sales can generate double-digit EPS growth.

The formula is:

This combination reliably produces the 10%+ EPS growth target, a hallmark of a quality compounder.

While the business model is robust, it is not without risk.

The valuation of Otis, when compared to its "Big 4" peers, reveals a profound market inefficiency.

As established in Section V, Otis is the highest-quality business in the oligopoly, defined by its industry-leading ROCE. Logically, it should trade at a premium valuation. The market data, however, shows the exact opposite.

This is a stark contradiction. The market is valuing Otis's inferior-quality peers at a premium. This dislocation is the entire opportunity. The market appears to be making a classic error: it is overly fixated on the cyclical NE headline risk (China) and is perhaps confused by the "negative equity" on the balance sheet. A quality investor recognizes this as a mispricing of durable, long-term value.

Otis Worldwide is a definitive "Wonderful Company at a Fair Price." It exemplifies the quality investing framework, combining a dominant, defensible moat with superior profitability and a clear, shareholder-friendly capital allocation policy.

The investment thesis is clear:

The market is making a classic error by fixating on the cyclical, low-margin "razor" (New Equipment). The quality investor should ignore this noise and focus on the durable, high-margin, and high-growth "perpetual blade" (Service and Modernization). The fact that this best-in-class asset trades at a discount to its lower-quality peers is the margin of safety.