Otis Worldwide Corp

Otis Worldwide Corp (OTIS) — Investment Memo

🐂 The Bull Case (Warren's voice)

This is a classic "toll bridge" business. You don't buy an elevator; you buy a lifelong subscription to gravity defiance.

• The Ultimate Annuity: The "razor and blade" model here is near-perfect. New equipment is the loss-leader (or breakeven) that secures a high-margin, recurring service contract for 20+ years.
• High Switching Costs: Replacing an elevator is a surgical nightmare. It involves tearing open the core of a building. Building owners will pay almost any reasonable price to avoid the chaos of a full rip-and-replace.
• Regulatory Capture: Safety codes are the moat's reinforced concrete. Proprietary software and strict liability laws make third-party maintenance a legal gamble that most REITs aren't willing to take.
• Exceptional Economics: Once the hardware is in the shaft, the incremental cost of a service call is low, but the value to the customer (not having people stuck in a box) is infinite.
• Attractive Entry: This becomes a Berkshire-style "wonderful company at a fair price" if we can acquire the recurring cash flow stream at a multiple that ignores the stagnant hardware growth.

🐻 The Bear Case (Charlie inverts)

"Show me where I'll die and I won't go there."

• The "Open Source" Regulatory Hammer: The biggest threat isn't a competitor; it's a government mandate. If regulators force Otis to open its proprietary diagnostic software to third-party technicians to "encourage competition," the moat evaporates overnight. The "lock-in" becomes a "door left open."
• The Death of the Vertical City: A structural collapse in commercial real estate (CRE) doesn't just stop new sales; it leads to "zombie buildings." If 20% of downtown office towers are abandoned or converted to residential without modernization, the service annuity decays.
• The Debt Trap: Management has traded a clean balance sheet for $7.7B in debt while revenue growth is effectively dead (1.6% CAGR). This isn't leverage for growth; it's leverage for financial engineering. When you borrow money to sustain a stagnant business, you aren't investing—you're decorating a sinking ship.

💰 Valuation & Margin of Safety

The DCF reveals a stark reality: the market is pricing in growth that the history books don't support.

• Intrinsic value estimate: $47.40 per share
• 25% margin of safety entry: $35.55 (conservative)
• 50% margin of safety entry: $23.70 (Buffett's ideal)
• Current Status: Grossly expensive. If the market price is anywhere near $90–$100, the market is paying for a growth story that doesn't exist in the financial statements.

Verdict: PASS

The intrinsic value of $47.40 is far below current market pricing. While the moat is wide, the stagnant revenue and ballooning debt suggest a management team more interested in optics than organic compounding. We do not pay a premium for a moat that is being used as a hiding place for debt.