Rodrigo Lopez Buenrostro of KUE Capital presented his in-depth investment thesis on OTIS (US: OTIS) at Wide-Moat Investing Summit 2020.
Thesis summary:
OTIS manufacturers, installs, and services the most critical component of any building — the elevator. As a spin-out from UTC in April 2020, OTIS offers an opportunity to invest in a market leader with a great business model. The company has “the best of both worlds”: it services a large installed base of elevators in Europe and the US and benefits from growth in emerging markets, particularly China, through the installation of new equipment.
OTIS is more profitable than its peers, with ROIC of 21% (vs 16%), for a simple reason: It boasts the highest market share of the service business, with 19%, which provides recurring revenue, long-term client contracts, sticky relationships (93% retention rates), and attractive EBIT margins of 20-22%.
As the segment leader, OTIS also generates market-leading FCF, which allows the company to pay down debt (investment-grade rating), pay a dividend, invest in technology R&D, and consolidate the fragmented services business in order to increase network scale and density.
Management is well-aligned with investors to maximize EBIT and FCF. Although the peers recently traded at an average estimated FCF yield of 3.7% and EV/EBITDA of 17x, and a close German peer (Krupp) was recently taken private by a private equity group at 19x EBITDA, the market recently appeared to undervalue OTIS, with an FCF yield of 5.5%.
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About the instructor:
Rodrigo Lopez Buenrostro works at Kue Capital where he invests to preserve capital over time. He pioneered the asset management division within the firm and divides his time between equity research and manager selection with a global mandate. Previously, Rodrigo worked as a summer equity analyst at SW Investments, a value-focused hedge fund in Chicago. He began his professional career as an Investment Banker at BBVA. Rodrigo is also an MBA graduate from Chicago Booth ’15 where he earned a concentration in Analytic Finance and was actively involved in the Investment Management community. He studied Business and Accounting at ITAM (Mexico Institute of Technology) for undergrad where he wrote his thesis on hedge funds and started to invest personally. Rodrigo has always had an interest in finding the real value of assets while negotiating with Mr. Market, reading, and volunteering at NGOs to teach basic concepts related to investing.
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