Over the last six months, Otis’s shares have sunk to $87.81, producing a disappointing 9.9% loss - a stark contrast to the S&P 500’s 12.9% gain. This may have investors wondering how to approach the situation.

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 for active Edge members.

Why Is Otis Not Exciting?

Despite the more favorable entry price, we're swiping left on Otis for now. Here are three reasons you should be careful with OTIS and a stock we'd rather own.

1. Slow Organic Growth Suggests Waning Demand In Core Business

Investors interested in General Industrial Machinery companies should track organic revenue in addition to reported 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 1.2% 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 5%. Although this projection implies its newer products and services will fuel better top-line performance, it is still below the sector average.

3. Free Cash Flow Margin Dropping

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

As you can see below, Otis’s margin dropped by 2.1 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. Otis’s free cash flow margin for the trailing 12 months was 9.2%.

Final Judgment

Otis’s business quality ultimately falls short of our standards. After the recent drawdown, the stock trades at 20.3× forward P/E (or $87.81 per share). Beauty is in the eye of the beholder, but we don’t really see a big opportunity at the moment. We're pretty confident there are superior stocks to buy right now. We’d suggest looking at one of our all-time favorite software stocks.

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