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: Otis’ estimate for how much commodity inflation will hurt is now quadruple what it was in February

Otis Worldwide Corp. raised its estimate for how much commodity inflation will hurt results this year for a third time to more than quadruple its estimate at the start of the year, as steel prices continue to rise.

Despite the higher cost outlook, the Connecticut-based elevator and escalator maker reported early Monday third-quarter profit and sales that rose above expectations, and raised its full-year outlook.

The stock
OTIS,
-4.54%

fell as much as 5.3%, before paring some losses to be down 3.9% in afternoon trading.

In the post-earnings conference call with analysts, Chief Financial Officer Rahul Ghai said “headwinds from commodity is now expected to be between $80 million to $90 million for the year,” according to a FactSet transcript of the call.

That’s up from the estimate of $70 million to $80 million Ghai provided three months ago, on the second-quarter earnings call, when he said the new outlook was a result of metal prices remaining elevated.

Ghai has previously said that of the company’s total spend on commodities, steel is about 80%. And continuous futures
HRN00,
-11.24%

for U.S. Midwest domestic hot-rolled coil steel haves soared more than 75% year to date. Read more about metals prices.

In late-April, in the call after first-quarter results, Chief Executive Judith Marks had said commodity headwinds were “about $15 to $20 million higher” than was originally thought, when the company first provided full-year guidance.

In the fourth-quarter earnings call on Feb. 1, Ghai said commodity issue “could be like a $20-million plus headwind” in 2021, after being a “tailwind” in 2020.

Basically, the new expected headwind is roughly four+ times what it was less than nine months ago.

Otis’s stock has fallen 7.0% over the past three months, but has advanced 21.9% year to date. In comparison, the SPDR Industrial Select Sector exchange-traded fund
XLI,
+0.14%

has advanced 18.7% and the S&P 500 index
SPX,
+0.45%

has rallied 21.6%.

Earnings beat, outlook raised

Earlier Monday, Otis reported third-quarter net income of $331 million, or 77 cents, up from $266 million, or 61 cents a share, in the same period a year ago. Excluding nonrecurring items, adjusted earnings per share grew to 77 cents from 69 cents, and beat the FactSet consensus of 73 cents.

Sales rose 10.8% to $3.62 billion, and were above the FactSet consensus of $3.55 billion. Meanwhile, the cost of products and service sold rose 11.8% to $2.56 billion.

Among Otis’ business segments, New Equipment sales grew 18.1% to $1.68 billion, above the FactSet consensus of $1.57 billion, while Service sales increased 5.1% to $1.94 billion but came up shy of expectations of $1.98 billion.

And despite the continued increase in the impact from commodity inflation, the company raised its guidance range for 2021 adjusted EPS to “~$2.95” from $$2.89 to $2.93, and for net sales to “~$14.3 billion” from $14.1 billion to $14.2 billion.

“We continue to advance our strategy, progress on ESG initiatives and achieve strong results, despite the macro environment, reflecting the resiliency of the business and our ability to execute,” CEO Marks said. “This gives us the confidence to improve the 2021 outlook and positions us well to build on this momentum in 2022.”

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