The building construction industry is waiting for lower interest rates to become a reality, which could mean new buildings come on line, boosting elevator company Otis Worldwide (NYSE: OTIS).
The stock has struggled — down 5% for the past year. But Otis, which also manufactures escalators and moving walkways, may present a buying opportunity for investors who are looking for a cheap stock and want to benefit from declining Asian interest rates and India’s construction growth.
Lower interest rates could spur replacement of aging equipment and infrastructure as well as leading to new building construction. The Federal Reserve has indicated it plans to decrease rates either this fall or in 2026. Many experts anticipate a cut in September.
Customers also are waiting for the central bank’s move before they commit to spending money on equipment such as elevators, said Judy Marks, CEO of Otis, according to Barron’s. “There is pent-up demand for when we get the next rate cut.”
Plenty of building
Construction activity is healthy in countries such as India, South Korea and China, which specializes in building high rises for its residents. South Koreans are fond of living in apartment buildings instead of homes because of the nearby amenities, while India’s housing boom continues.
Otis’ services business also is primed for growth. For example, it conducts maintenance and upgrades on its elevators. “Aftermarket services are exempt from tariffs and provide an opportunity for Otis to accelerate growth, especially in China, where aging equipment should lead to high demand,” said Kristina Ruggeri, an Argus Research analyst who gives the company a “buy” rating.
Service revenue props up the company’s profit margins during slower periods, when construction demand is less. Also, consumers demand elevators that move faster, especially in apartment buildings or offices. “Elevators are getting older everywhere. They need tech and aesthetic refreshes,” Marks said.
Service sales strength
Service net sales climbed 6% in the second quarter from a year earlier, while organic sales rose by 4%. “Modernization acceleration continues, with orders growing greater than 20% and backlog growing mid-teens,” Marks said in the earnings statement.
With the recent decline in U.S. mortgage rates, homebuyers might be on the move again, especially for high-rise condos. Otis is counting on new orders to come, especially for its home market. The U.S. Dodge Momentum Index, a gauge of construction activity, has gained for the past several months.
Compared to its European competitors, Schindler Holding and Kone (CBOE: KNEBV), Otis is trading at a discount, according to Nick Housden, RBC Capital Markets analyst, who gave Otis an outperform rating. It has the “highest profit exposure to maintenance” and is the “highest-quality company” in its sector, he said.
If global construction activity rises, Otis shares could be headed higher.
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