Q2 2025 - Otis Worldwide - Analysis
China New Equipment woes and US uncertainty slowly create buying opportunity
Today, before the bell, Otis Worldwide reported its Q2 and 1H 2025 earnings. At the time of writing, Otis shares are down 11%, after being down as much as >13%. Clearly, that’s a big move, and it seems as if Otis isn’t the only name. In this blog, we’ll address Otis’ Q2 report (even though it’s a very underweight position for us at 1.5%) and our updated valuation model. Additionally, we’ll share our thoughts/two cents on Q2 earnings season thus far (sort of mini weekly digest if you will).
So far, stock prices have reacted very widely on earnings reports. Seeing Philip Morris, MSCI, Texas Instruments, ASML, ASM International… drop close or more than 10% in a single day isn’t your typical market. The opposite’s also true: shooting 13% higher (e.g., ThermoFisher) or even 60% (Medpace) as if the whole investment thesis had changed because of one earnings report or exceeding previous quarter’s guidance. We get it that investor expectations (be it too low or too optimistic) may cause violent moves, but it’s remarkable how volatile Q2 earnings season has kicked off.
As we’ve mentioned previously, Q2 would likely have been the first major test for many companies: uncertainty around the tariffs, higher costs eating into profitability, visibility on next quarters and in particular: budgeting growth investments. To compound shareholder capital, companies have to reinvest into high return opportunities. With increased uncertainty, many (fortunately not all) companies’ reinvestment engine gets (severely) delayed and/or with lower expected IRRs.
Turning to Otis, we’d summarize the second quarter as in line with prior quarters’ trends, although the trough for ongoing weakness in China on the New Equipment side is still yet to be marked. Otis’ high-margin Maintenance & Repair segment continues to provide reliable cash flow, but past quarters’ free cash flow trends have continued to softer due to the shaky post-COVID situation in New Equipment, Otis’ least profitable segment for which cash collection is much more favorable.