Otis Worldwide Corporation (NYSE:OTIS) Downrated by Wolfe Research

Otis Worldwide Corporation's shares fell by 3% in pre-open trade on Tuesday after Wolfe Research downgraded the stock from "outperform" to "peer perform." This move follows a recent rally, where OTIS shares surged by 15% post the announcement of China's real estate stimulus measures.

Wolfe analysts acknowledged the potential positive impacts of these measures on China’s real estate market, essential for sector sentiment. However, they raised concerns regarding persistent risks to pricing and margins in 2025.

The swift rise in OTIS shares has led to a valuation of 25 times its next 12-month earnings per share estimate, aligning more closely with Wolfe's end-of-2025 target price range of $86 to $125.

Despite China representing 14% to 15% of OTIS's projected sales for 2024 and 10% of its EPS, market perceptions about China significantly influence the stock's performance.

While China's stimulus may stabilize its ailing real estate sector, Wolfe analysts remain cautious. The ongoing price declines in China (over 10% in the last 6 to 9 months) continue to negatively impact new equipment margins, potentially affecting OTIS’s earnings performance in 2025.

This downgrade reflects a more balanced perspective on the stock's risk and reward dynamics. Beyond China, OTIS's maintenance and repair division is projected to see moderate growth, anticipating around 5% revenue growth in this area.

However, the new equipment segment poses challenges for overall company performance, with Wolfe predicting difficult quarters ahead. Although there are slight upward adjustments for 2025 estimates due to a stronger Chinese yuan, Wolfe's forecast remains slightly below broader market expectations.

Currently, OTIS trades at a slight premium compared to its sector peers, and Wolfe analysts no longer see sufficient upside potential to uphold an outperform rating. They caution that while China's stimulus could lead to favorable developments, risks associated with pricing pressure and margin compression dampen their overall optimism.