Better Than Bonds Right Now

After a year of price compression, Otis Worldwide has reached a valuation inflection point that makes it one of the most compelling defensive compounders in today's market. With the stock trading in the low-$90s range—down from its October 2024 high of $106—investors can now acquire a resilient business model at a reasonable price just as free cash flow generation enters an upward trajectory.

The Thesis: A 12% CAGR With Downside Protection

The opportunity is straightforward. Otis now offers an approximately 12% forward CAGR when you include buybacks—the most attractive total return profile the stock has presented since 2022. This return stream comes from a business that generates the kind of predictable, recession-resistant cash flows that defensive investors crave, yet the market is pricing OTIS as if structural growth has stalled.

Here's the math. Management has raised full-year 2025 adjusted EPS guidance to $4.04-$4.08, representing 5-7% growth over 2024. Add in a buyback yield of approximately 2.3% (based on $800 million in repurchases against a $35 billion market cap) and a dividend yield near 1.8%, and you're looking at high-single-digit to low-double-digit annual returns before any multiple expansion. At a forward P/E around 22-23x—below the five-year historical average of 27x—there's meaningful upside if the market re-rates this quality compounder.

The Moat: Recurring Revenue From Captive Assets

What makes Otis truly defensive is its economic moat. With an industry-leading 2.5 million elevator and escalator units under service, Otis owns a captive installed base that generates highly predictable maintenance revenue. These aren't discretionary purchases—building owners must maintain their vertical transportation equipment for safety and regulatory compliance.

The Service segment, which represents the crown jewel of the business model, grew organic sales 6% in Q3 2025 and expanded operating margins by 70 basis points. This segment now drives the majority of profitability and exhibits the kind of revenue quality that defines a true defensive position. Maintenance contracts are multi-year agreements with high renewal rates, creating a revenue stream that compounds through both unit growth and price increases.

Even more compelling is the acceleration in modernization—a higher-margin business where Otis upgrades aging elevator systems. Modernization orders surged 27% in Q3, with backlog up 22%. As the global installed base ages, this represents a structural tailwind that will drive margin expansion for years.

The Inflection: Free Cash Flow Acceleration Ahead

The temporary working capital headwind that has pressured free cash flow conversion is set to reverse. In Q3, adjusted free cash flow was $337 million, representing an 81% conversion rate—well below the company's normalized 100% target. The culprit? A business mix shift as New Equipment sales declined $300 million while Service grew $340 million year-to-date. Since New Equipment requires less working capital than Service (customers pay upfront), this mix shift created a temporary cash drag.

But here's what matters: this is transitory. As New Equipment stabilizes and Service growth continues, working capital will normalize. Management expects Q4 free cash flow around $700 million, bringing the full-year total to approximately $1.45 billion. Looking forward, as the Service mix continues to grow and working capital normalizes, free cash flow conversion should return to—and potentially exceed—100% of earnings.

This inflection in free cash flow generation is precisely what makes OTIS attractive now. You're buying at a point where cash flow metrics look temporarily depressed, but the underlying business fundamentals are actually strengthening.

The Defense: Resilient Through Economic Cycles

In uncertain economic times, OTIS offers defensive characteristics that few industrial businesses can match. Consider the revenue composition: approximately 60% comes from Service, which exhibits GDP-like growth characteristics regardless of new construction activity. When new building starts slow—as they have in China and parts of the Americas—the Service business continues to compound steadily.

The company's geographic diversification provides additional ballast. While China New Equipment sales face headwinds (down 20% in Q3), this was more than offset by strength in other regions and the Service segment. The Americas grew equipment orders double-digits, demonstrating that OTIS isn't beholden to any single market's construction cycle.

Importantly, the Service business is largely tariff-resistant. Unlike New Equipment, which faces potential tariff impacts, service work is local and insulated from trade tensions. With Service growing and representing an increasing mix of total revenue, OTIS becomes progressively more defensive with each passing quarter.

The Quality: ROIC Profile Speaks Volumes

From a quality standpoint, OTIS exhibits the high returns on invested capital that separate true compounders from mere cyclical businesses. The asset-light Service model requires minimal incremental capital while generating expanding margins. This is exactly the profile that creates long-term shareholder value—a business that can reinvest at high rates of return while simultaneously returning substantial cash to shareholders.

The company has already returned approximately $800 million to shareholders through buybacks in 2025, with an ongoing commitment to capital allocation discipline. When you combine buybacks with the organic growth in high-ROIC service revenue, you get a compounding machine that creates value through multiple channels simultaneously.

The Valuation: Finally Reasonable After 2024 Compression

Here's where opportunity meets preparation. After trading at premium valuations through much of 2024, OTIS has compressed to a forward P/E around 22-23x—a level last seen in 2022. This represents a 9% discount to the five-year historical average and brings the valuation in line with the forward growth rate, creating what looks like fair value for a quality defensive business.

At current prices in the low-$90s, you're paying a reasonable multiple for a business with:

• Industry-leading market position

• 60%+ recurring revenue with pricing power

• Accelerating high-margin modernization growth

• Margin expansion runway in Service

• Free cash flow inflection on the horizon

• 2-3% buyback yield providing a strong return floor

The Case For Action

For investors seeking defensive compounders that can deliver steady returns through various market environments, OTIS presents a rare setup. The valuation has finally reached a range where both yield-focused and growth-oriented investors can find appeal. The combination of EPS growth, buyback yield, and dividend yield creates a high-single-digit to low-double-digit return profile with limited downside risk.

The inflection in free cash flow generation provides the catalyst, while the resilient Service business provides the safety. You're not paying for perfection—the market has already discounted the China headwinds and New Equipment softness. What you're getting is a chance to own a true compounder at a reasonable price just as the cash flow metrics begin to inflect upward.

In an environment where defensive positioning matters, owning Otis Worldwide at current levels offers both protection and participation. The 12% forward CAGR comes not from aggressive assumptions, but from the compounding power of a high-quality business model finally available at a sensible price. That's the definition of a defensive stock worth owning. Would you like to stay ahead of opportunities like this? Join our community where we share real-time trade alerts and deep-dive analyses of businesses with true competitive advantages. Don't just trade the market - invest in excellence.

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