Over the past six months, Otis’s stock price fell to $88.58. Shareholders have lost 11.5% of their capital, which is disappointing considering the S&P 500 has climbed by 8.6%. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.
Is there a buying opportunity in Otis, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is Otis Not Exciting?
Even though the stock has become cheaper, we're sitting this one out 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
In addition to reported revenue, organic revenue is a useful data point for analyzing General Industrial Machinery companies. 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 1.6% 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 4.1%. While 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 1.9 percentage points over the last five years. Continued declines could signal it is in the middle of an investment cycle. Otis’s free cash flow margin for the trailing 12 months was 9.5%.
Final Judgment
Otis isn’t a terrible business, but it doesn’t pass our quality test. After the recent drawdown, the stock trades at 20.5× forward P/E (or $88.58 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 a top digital advertising platform riding the creator economy.
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