Elevators, a very dynamic market where you can bet on the stock market

(BFM Bourse) – The elevator and escalator sector could reach a turnover of almost 100 billion euros within eight years, according to Credit Suisse. This market is highly concentrated and dominated by four major players.

These are infrastructures that we use a lot every day, and whose growth potential is not necessarily known: Elevators.

This human-sized vertical transport device has complicated origins to date, with premises dating back to antiquity. It is also difficult to know the number of elevators in the world, but in 2017 the national elevator industry identified 1 million in the United States and Canada combined.

The elevator is inseparable from the urban landscape and remains a mechanism of constant technological change, integrating, for example, artificial intelligence and the Internet of Things in recent years. “Artificial intelligence is used in predictive maintenance,” which allows “to analyze [des] data to make the operation of elevators more reliable” and thus avoid breakdowns, explained Guillaume Fournier-Favre, general manager of Kone France, on BFM Business last year.

Modernization as a locomotive

Above all, the sector is experiencing relatively high growth. In a study published on Tuesday, Credit Suisse estimates that the overall elevator and escalator market is expected to grow from just over €60 billion in 2021 to almost €100 billion in 2030, an average annual growth of around 4.5%.

The market for new installations should grow by 2% on average in terms of value. In terms of volume, Credit Suisse estimates that the number of new elevators and escalators, after reaching a peak of more than 1 million in 2021, should settle and develop between 950,000 and 850,000 units per year. This is due to a 25% drop in China, where the real estate market is struggling due to developers’ financial difficulties.

In value, this segment will increase from 26.5 billion euros in 2021 to 30.8 billion euros in 2030, with a contribution of around 10% of the price increase. The number of lifts and escalators in operation will increase from 20 million in 2022 to around 27 million in 2030.

The maintenance market for these facilities is expected to reach 45 billion euros in 2030 compared to 32 billion in 2021, i.e. an average growth of 4%. Modernization would be the most dynamic with an average annual increase of 11% and would exceed 20 billion euros in 2030.

A bounty to win back

But beyond these engaging views, why invest in elevators? Deutsche Bank provided more answers when the bank began monitoring the sector last month.

“The actions of [groupe d’] elevators offer exposure to strong long-term trends, in particular urbanization in key markets and the search for energy efficiency, while benefiting from a consolidated market with non-discretionary and recurring service income”, the German bank developed. It is therefore shares that enable play on megatrends, such as the energy transition, but also the Internet of Things (IoT) and the urbanization of large cities in emerging countries, synonymous with the erection of buildings.

In the shorter term, the bank estimates that the recent difficulties in the sector, namely the uncertain economic situation in China and the increase in commodity prices, will subside by the end of 2023, with an improvement in margins from next year.

This should allow these stocks to recover the valuation premium they are expected to enjoy compared to the MSCI Capital Goods – an index that groups global stocks that produce capital-intensive equipment – due to their attractive business model (strong margins, recurring service revenues and structural growth).

Schindler’s defensive profile

In terms of players, the sector is highly concentrated. Four groups thus share almost two-thirds of the market according to Credit Suisse: the American Otis (18%), the Swiss Schindler (16%), the Finnish Kone (also 16%) and Thyssenkrupp Elevators (TKE, 13%), which was the result of a sale of the elevator division of the German conglomerate Thyssenkrupp to foundations.

In terms of arbitrage, Deutsche Bank, which follows Kone and Schindler, prefers to bet on the Swiss group with a buy recommendation, against “hold” for Finnish. The bank observed last month that Kone was trading at a significant premium to the capital goods sector, while Schindler posted a valuation in line with that department. What the bank considers unjustified, because Finnish margins have slightly more than the Swiss ones.

During the first nine months of the year, Kone saw its adjusted operating margin reach 8.9% against 12.3% the year before. A less pronounced drop at Schindler, whose same indicator also came in at 8.9%, but a drop of only 2.4 percentage points from 11.4%. in the first nine months of 2021.

Deutsche Bank also considers Schindler’s profile to be more defensive, as it is more focused on services and less on new installations, whose main driver remains China. Thus, its lower exposure to the world’s second-largest economy, in the midst of a property crisis, should enable it to outperform its peers, according to Deutsche Bank.

As for Otis, most analysts remain “neutral” on the value, according to Investing.com, with an average price target of $77 per share. share below the current price of $81.6. The group suffered this year from the very significant decline in the Chinese market for new installations, which led to a fall in revenue of 4.5% in the first nine months of the year.

Julien Marion – ©2022 BFM Bourse

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