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Otis Worldwide (OTIS) is receiving a lift today after slightly topping earnings estimates in Q1. The elevator and escalator manufacturer missed revenue projections for the second-straight quarter and lowered its FY22 earnings and revenue guidance. However, with heightened macroeconomic uncertainty sparked by recent lockdowns in China, the war in Ukraine, unabated price inflation, and rising interest rates, OTIS's FY22 outlook fared better than investors feared, driving today's modestly favorable price action. OTIS also raised its quarterly dividend by 20.8%, bringing the annual yield to 1.6%, from about 1.3%.

Additionally, a gloomy picture of the health of the elevator/escalator industry painted by competitor Schindler Holding last week also tempered expectations for OTIS. Schindler noted that new installation margins in Q1 worsened due to material cost inflation, which also stirred a 33% increase in the negative impact on its bottom line for FY22. Furthermore, Schindler was blunt about the situation in China, stating that growth in this region would fall roughly 15% on the year due to a deteriorating construction industry.

• With commodity inflation in-line with OTIS's prior expectations, the company expanded adjusted operating margins by 30 bps yr/yr in Q1 to 15.9%. This helped OTIS improve its bottom line 7% yr/yr, boasting an adjusted EPS of $0.77.
• OTIS has also been cautioning investors on the problematic situation in China for the past few quarters, laying out its expectations last quarter that the China market would be down 5-10% in FY22. This projection is coming to a front, with the region contracting by mid-single digits in Q1. Nevertheless, new equipment orders were still up 3% yr/yr in China. New equipment growth was seen across all regions, with EMEA shining the brightest at 17%.
• Despite solid new equipment order growth, net sales still declined 2.5% yr/yr, weighing on overall sales growth in the quarter, which was essentially flat at 0.2% to $3.41 bln. OTIS's larger segment, Service, assisted in keeping net sales from turning negative, showing decent growth of 2.2% yr/yr.
• Revenue growth is not likely to improve for the year either, as illustrated by OTIS's lowered guidance of $14.1-14.3 bln. That translates to a decline of 0.5% yr/yr at the midpoint. OTIS also narrowed its FY22 adjusted EPS guidance to $3.22-3.27, from $3.19-3.31.
• OTIS's earnings outlook represents yr/yr growth of +9-11%, which is impressive given the soaring commodity and other supply chain inflation. The company's Service segment is anticipated to benefit from better-than-expected maintenance pricing and repair orders along with an improving supply chain, paving the way for a slight bump in estimated growth to +5-6%, from +4-6%.

With the current global environment plagued by numerous headwinds, the bright spots from OTIS's Q1 results are outshining its other dullish numbers. Still, its downbeat FY22 guidance is a concern.

We see that as more of a reflection on the many macroeconomic headwinds currently impacting the elevator/escalator industry than issues within OTIS's control. With the stock trading roughly 13% lower on the year, its valuation of 20x FY23 earnings, and recently increased dividend yield, OTIS is well-positioned to benefit from a recovery in global supply chains. Unfortunately, OTIS is unable to provide a clear view into when this may occur, only that it is likely extending into 2023.