• Modine Manufacturing stock signals a new buying opportunity within its strong upward trend.
• In 2024, it doubled its value on the New York Stock Exchange, with 38 new all-time highs.
• Over the last 26 trading sessions, MOD stock has declined by 19% overall, reaching critical support levels where buying interest is expected.
• The excellent operating EBITDA and FCF growth rate offsets its seemingly high valuation.
• The recent acquisition of Scott Springfield enhances medium-term expectations for the company’s outlook.

Thesis

Modine Manufacturing (NYSE:MOD) is a promising small-cap company valued at $6 billion in the Automotive Parts & Equipment Industry.

It targets investors who are willing to strengthen their portfolio with high momentum, taking advantage of pullback opportunities.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of MOD either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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• Modine Manufacturing remains a compelling Buy, thanks to its growing hyperscaler partnerships and growing global manufacturing capacity during the data center capex boom.
• As more advanced chips are released, we expect data center cooling and server liquid cooling systems to be increasingly vital during the next cloud super cycle.
• MOD’s attractive investment thesis is also exemplified by its ability to finance their growth organically through Free Cash Flow generation, as observed in its stable balance sheet health.
• Despite the triple-digit stock price YTD outperformance, the stock remains reasonably valued compared to the sector median and its thermal management competitors.
• With MOD successfully bouncing off its new support levels of $119s and the trend pointing to a potential next leg up to $132s, we are reiterating our Buy rating here.

MOD Remains Attractively Valued Despite The Monstrous YTD Rally

We previously covered Modine Manufacturing Company (NYSE:MOD) in August 2024, discussing its timely investments and strategic capacity expansions during the data center capex boom.

Combined with the accretive M&A activities and healthier balance sheet, we believed that the company remained well positioned to report robust profitable growth ahead, resulting in our reiterated Buy rating upon a moderate retracement to its previous trading ranges of between the $108s to $98s for an improved margin of safety.

MOD YTD Stock Price

Since then, our Buy point has materialized by September 2024, with the MOD stock also recovering by +30% by the time of writing – a trend similarly observed in its direct peers to varying degrees.

Part of the rally is also attributed to the double beat FQ2’25 earnings performance, with revenues of $658M (inline QoQ/+6% YoY), richer adj EBITDA margins of 15.1% (-0.1 points QoQ/+2.1 YoY), and adj EPS of $0.97 (-6.7% QoQ/+8.9% YoY).

Much of MOD’s recent tailwinds are naturally tied to its ability to capitalize on the data center boom and the resultant insatiable demand for advanced cooling solutions as AI chips consume higher power and server racks emit more heat.

This development has already triggered its data center related sales growth to $158.9M (-2.2% QoQ/+101.6% YoY) and expansion in the Climate Solutions segment’s adj EBITDA margin by +3 points YoY.

While the outperformance has been partly negated by the demand headwinds in the heat transfer/legacy automotive end markets along with the impact of divestitures, as observed in the single digits YoY overall growth, there is no denying its robust prospects in the intermediate term indeed – with the manufacturing company seemingly on track to growing its data center business from $500M in annual sales to $1B over the next three years.

Therefore, while MOD has reiterated their FY2025 guidance, readers may look forward to continued outperformance as similarly hinted by the management:

Our outlook for the data center business continues to improve, driven by strong organic growth and the strategic actions taken over the past year, including the acquisition of Scott Springfield… We are gaining share with both colocation and hyperscale customers and continue to expand our product offering and our manufacturing capacity to meet market demand. (Seeking Alpha)

The same has been observed in its H1’25 results, with revenue growth by +12.9% sequentially/+5.6% YoY and adj EPS growth by +33.1% sequentially/+15.5% YoY, with an FY2025 bottom-line beat on the midpoint guidance of +7.5% YoY and +13.8% YoY, respectively, very likely in our opinion.

The Consensus Forward Estimates

These reasons may also be why the consensus has upgraded the forward estimates, with MOD expected to generate accelerated top/bottom-line growth prospects at a CAGR of +9.5%/+22.3% through FY2027.

This is compared to the original estimates of +8.5%/+19.2% and the historical growth at +1.7%/+15.7% between FY2019 and FY2024, respectively.

If anything, based on MOD’s completed capacity expansions in the UK, ongoing expansion in Canada, and planned expansion in India, we believe that the consensus forward estimates appear to be rather conservative compared to the management’s long-term sales target growth at a CAGR of +11.5% and adj EBITDA margins of 17% by FY2027 (compared to the current 15.1%).

Despite the naturally elevated capex, it is also important to highlight the manufacturer’s ability to finance their growth organically through its Free Cash Flow generation, as observed in its stable balance sheet health at a leverage ratio of 0.9x in the latest quarter (compared to 1.1x in FQ1’25 and 0.8x in FQ2’24).

MOD Valuations

This is also why we believe that MOD is not overly expensive at FWD P/E non-GAAP valuations of 32.20x, despite the notable upgrade from its 5Y mean of 15.79x, 10Y mean of 12.57x, and the sector median of 17.09x.

This is attributed to its relatively cheap FWD PEG non-GAAP ratio of 1.20x, based on the CAGR of +26.7% between the management’s FY2025 adj EPS guidance of $3.70 at the midpoint and the consensus FY2027 adj EPS estimates of $5.94.

While elevated compared to its 5Y mean of 0.86x and the 10Y mean of 0.78x, MOD remains reasonably valued compared to the sector median of 1.61x and its direct thermal management competitors, including Vertiv (VRT) at 1.31x, Lennox International Inc. (LII) at 1.73x, and AAON, Inc. (AAON) at 3.42x, respectively.

So, Is MOD Stock A Buy, Sell, Or Hold?

MOD 2Y Stock Price

For now, MOD has continued to chart higher highs and higher lows as observed in the robust uptrend since mid-2023, as it also trades higher than its 200-day moving averages.

For context, we had offered a fair value estimate of $102.60 in our last article, based on the management’s FY2025 adj EPS guidance of $3.80 at the midpoint (+16.9% YoY) and the stable P/E valuation of ~27x on a YTD basis, implying the stock’s premium trading prices at current levels of $120s.

Even so, based on the consensus FY2027 adj EPS estimates of $5.94, there remains an excellent upside potential of +30% to our long-term price target of $160.30, despite the significant YTD rally by +106%.

If anything, MOD’s new hyperscaler contract wins are likely to trigger new tailwinds to long-term growth, with the management already “building a relationship with the third (hyperscaler) and expect to get our first order in this quarter,” building upon its existing growth from “both colocation and hyperscaler customers.”

As a result, we are maintaining our Buy rating here, as the MOD stock also successfully bounced off its new support levels of $119s, with it supporting its next leg up to $132s ahead.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The analysis is provided exclusively for informational purposes and should not be considered professional investment advice. Before investing, please conduct personal in-depth research and utmost due diligence, as there are many risks associated with the trade, including capital loss.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Modine Manufacturing’s AI Prospects Boosted By Expanded Capacity And Promising FY2027 Target appeared first on Up2info.com.

• Modine Manufacturing’s strategic initiatives and market expansion efforts are driving significant revenue and adjusted EBITDA growth.
• In contrast, the identified material weakness is likely to require time and resources.
• However, I think the focus on margin expansion and data centers is the right move.

The Modine Investment Thesis

I strongly believe that Modine Manufacturing Company (NYSE:MOD) will grow its data center revenue significantly this year and next, and is an interesting play on the AI revolution. And we can see that

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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• Modine Manufacturing’s shifted focus from auto engine to computer datacenter cooling is paying off on booming AI-related construction.
• The stock has experienced a +710% total return over 3.5 years since my last bullish article, outperforming nearly all U.S. equities.
• The current valuation is quite high with a forward P/E above 34x, despite only moderate forecasted company-wide sales growth of +10% and EPS gains of +20% yearly.
• I am downgrading Modine to Sell, recommending avoidance until a significant selloff occurs.

Three years ago, Modine Manufacturing Company (NYSE:MOD) was in the process of exiting its auto engine cooling businesses to focus on computer datacenters. The company paid off high debt levels with the proceeds from its asset sales, and has benefited incrementally from the explosion in AI (artificial intelligence) datacenter construction the last few years. Total company revenue generated from datacenter demand is projected by management to grow from 12% last fiscal year to 30% by 2027.

Following my initial Buy suggestion in May 2021 here, the stock quote languished into early 2022, then took off to generate market-leading gains for investors. Few other equities traded in America have bested the +710% total return outlined by Modine over the past 3.5 years.

However, the bullish angle of purchasing an underfollowed stock priced at a forward P/E under 10x is a world away from today’s situation. Everyone in the tech world knows about Modine’s strong growth tied to the AI revolution, and the forward P/E is now up to 34x.

With company-wide sales growth projected by analysts to rise at a somewhat pedestrian +10% a year, with EPS gains projected at a rate closer to +20%, Modine has reached a full valuation to even overvalued range during late 2024. It’s become an AI darling, where actual business expansion could easily fail to match heightened investor expectations.

As a consequence, I am downgrading my Modine view to Sell. I would avoid this security until a sizable selloff materializes. There’s little doubt in my mind that an AI-centered market meltdown will equally pull Modine down by -25% to -50% in price.

Stretched Valuation

Unfortunately for investors, the only real difference between late 2024 and early 2021 is the growth path for the company is somewhat clearer, as computer datacenter (construction) demand takes off. However, the vast majority of company sales are not derived from the AI boom (80% other industries vs. 20% datacenters in fiscal 2025), leaving total revenue growth quite susceptible to a slowdown (recession) in the global economy.

The pertinent question for investors: is it worth paying 200% or 300% the valuation setup of 2021 to capture AI-related growth?

Below, I have drawn the swing in stock valuation metrics on trailing operating results since late 2019. Price to sales has jumped from 1x to 3x since late 2020. Price to cash flow has increased markedly, from around 6x to almost 34x. And, price to book value has spiked from 2.5x to 9x.

Using the enterprise value calculation as a yardstick, Modine looks equally extended for how Wall Street is pricing the company. When we include changing debt and cash levels, EV to trailing EBITDA of 23.4x and sales of 2.9x are triple the level of 2019-22.

Seeking Alpha’s Quant Rating system agrees with my overvaluation assessment. The Valuation Grade is a “D-” looking at the stock’s 5-year trading history and comparing the current setup to industry peers and competitors.

Final Thoughts

To me, after such a dramatic increase in the stock quote, today’s high valuation is not adequately supported by admittedly decent growth rate projections. I would prefer a much lower stock quote to buy into the evolving AI story.

How much lower? In my opinion, $80 to $100 per share would be an honest buy range, using 20% EPS growth rates. Reviewing PEG valuation ideas (price to earnings divided by earnings growth rate), a ratio closer to 1.0x would be the optimal setup to acquire a position. 20x to 25x forward estimated EPS results is the area I would consider purchasing shares.

Is a -25% to -40% price tank guaranteed to happen? No, but in stock market trading/investing, the price and valuation you pay upfront is often the biggest driver of investment returns over a holding period of one or two years. I would also add, from my analysis and experience, a -50% price crash to $65-70 is the line in the sand for me to raise my rating of this equity to a Strong Buy, all other variables remaining the same. The majority of investors in 2024 (buying at the AI-related peak) would likely panic sell on this outcome, while a PEG number below 1.0x would be available for new investment.

What could keep the share quote in an uptrend? It’s the Goldilocks scenario of falling interest rates, an expanding Wall Street boom in AI names, and an improving economy overall, adding to Modine’s sales and income.

It’s akin to a game of “Press Your Luck,” hoping that economic whammies don’t show up soon. For example, a crude oil spike (from Middle East turmoil and fighting) could force inflation and interest rates higher, while sending the economy into recession. If this scenario plays out, Modine will be back under $100 without much selling or warning.

For me, the odds of a flat to lower share price over the next 12-months are too great, having traded through a variety of stock market booms since 1986 (including the overall market, sectors and individual names).

My investment opinion is, now it seems to be the time in a stock trading cycle to tread cautiously, especially if you are contemplating acquiring a position. I am downgrading my official Modine Manufacturing 12-month outlook to Sell. Something of a breather and retracement period should play out into the spring or summer of 2025.

Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

This writing is for educational and informational purposes only. All opinions expressed herein are not investment recommendations and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity and is not a registered investment advisor. The author recommends investors consult a qualified investment advisor before making any trade. Any projections, market outlooks, or estimates herein are forward-looking statements based upon certain assumptions that should not be construed as indicative of actual events that will occur. This article is not an investment research report, but an opinion written at a point in time. The author's opinions expressed herein address only a small cross-section of data related to an investment in securities mentioned. Any analysis presented is based on incomplete information and is limited in scope and accuracy. The information and data in this article are obtained from sources believed to be reliable, but their accuracy and completeness are not guaranteed. The author expressly disclaims all liability for errors and omissions in the service and for the use or interpretation by others of information contained herein. Any and all opinions, estimates, and conclusions are based on the author's best judgment at the time of publication and are subject to change without notice. The author undertakes no obligation to correct, update or revise the information in this document or to otherwise provide any additional materials. Past performance is no guarantee of future returns.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post I Loved Modine Manufacturing At $16, Not So Much At $136 (Rating Downgrade) appeared first on Up2info.com.

• Modine Manufacturing’s strong margin expansion, fueled by data centers and a sales mix-shift, is seemingly underappreciated by the market.
• This makes the company’s valuation attractive relative to its growth and profitability prospects.
• Yet, as I have concerns about the company’s end-market concentration and dependence on continuing AI-demand, I rate the company a “Hold”.

Investment thesis

The company’s stock has done amazingly well, as both Modine Manufacturing’s (NYSE:MOD) management and the market have high expectations for revenue growth and rapid margin expansion based on data center demand and a mix-shift from components to systems.

Modine Manufacturing Overview

Founded in 1916, Modine designs and manufactures thermal management components and systems, these are split into two segments:

Performance Technologies are mostly used in the automotive and vehicle sectors, with the industry holding a 51% revenue share, as evidenced by the revenue split which is to be seen below. Here, electric vehicles are a major growth driver. They are also employed in industrial and residential applications, however.

Climate Solutions are components for HVAC&R manufacturers or are used to cool buildings, and importantly data centers. These are the current growth and margin expansion drivers for the company. What is important to note is that the sub-segment “Heat Transfer Products” also has some data center exposure.

A globally diversified manufacturing network helps the company to not be dependent on a single country, while most sales are in stable geographies, mainly the US and Europe.

The company has stated that as part of its “80/20-strategy”, meaning that 20% of work delivers 80% of the results, it will focus and invest in the parts of the business that can achieve the highest growth and the strongest margin expansion.

Interestingly, the success of this approach can be seen in its recent returns on capital employed (ROCE), a metric that tracks the returns the company achieves when deploying capital:

Subsequently, as the company aims to increasingly move from merely supplying components to offering entire systems, controls, and software, it has signaled strong margin expansion to the market. This is also the reason its stock price has increased by almost 10x over the last 3 years, despite the company mainly losing value for much of its 20-year public life.

Moat

Scale

Through superior manufacturing scale and its global footprint, the company has more flexibility and resilience to offer to customers who rely on Modine’s components and systems than smaller contenders or competitors from Asia, which might carry geopolitical risks.

Technology

With Modine being the most technologically differentiated manufacturer for some of its sub-segments, I can see a moat based on technology.

However, this is only true for some of its sub-segments, like Air-Cooled Applications, I can therefore not see a significant moat for the entire company. As I also don’t see a commoditization for most of the company’s offerings, as evidenced by the company’s higher value-add and resulting margin expansion, I see MOD’s moat as small or narrow.

Over time, with the company shifting to more offerings that add more value to its customers, it’s possible that MOD’s moat evolves as it has in the last few years.

Financials

Modine Manufacturing’s revenue has grown nicely over the last decade. Although, as characteristic for industrial companies and suppliers, with a bit of volatility between the cycles:

Although looking at Modine’s operating margin development over the last 5 years, it is evident that management has managed to deliver amazing performance regarding margin expansion.

It is important to realize how significant this development is. The annual operating margin chart for the last decade should help to visualize this:

The Earnings per Share (EPS) have consequently closely followed:

Modine’s long-term debt stands at $404m as of 1Q25, which is the last reported quarter. With $73m in cash and $115m in stock-based compensation adjusted-FCF in the last year, these are acceptable levels, and servicing them should be no problem even if growth stagnates from here on.

While it has not hurt shareholders so far, as shares are up over 1000% in the last 36 months, continuous dilution by about 1% per year is evident, and something investors might want to keep an eye on – especially if growth, and with that likely demand for shares, slows.

Valuation

Click to enlarge

*Using Seeking Alpha’s non-GAAP numbers based on 10/4/24 share prices at closing

Something to note is that I’m using the lower of the two analyst estimates for FY2027, as the average would likely be distorted due to the low number of data points.

Looking at historical metrics makes little sense to me, as the company is more profitable and growing faster than ever. This, at least to some extent, justifies the P/E, P/FCF, and other metrics being multiple times that of where they were before MOD’s breakneck margin expansion.

Therefore, I will take a different approach.

As we can see from the company’s Investor Day presentation, management guides for 11.5% revenue growth at the midpoint – which is more than 2% above the 9.1% analysts currently expect:

However, what is also visible is just how dependent the company is on data center cooling, the growth of which it estimates at 50% CAGR until 2027.

Further, the company has guided for 20-25% earnings growth at its Investor Day between 2025 and 2027 – also well above analyst estimates.

Taking these two guidance points into account, together with being valued in line with the market which also trades on a PEG-ratio of 2 (30 P/E and 15% earnings growth), I think that Modine is fairly valued here. However, that assumes management can achieve its guidance. Fortunately, management has a good track record of capital allocation and value generation and has a majority of their publicly known investments in the company.

I view the spread between the analyst estimates and management guidance similar to a margin of safety here, which is why I think that the valuation is fair at the current price.

That fair value estimate only takes into account the quantitative part of the valuation. From a qualitative perspective, I see the issue of little downside protection due to hardly any recurring revenue and an enormous spread between the company’s segments that considerably contribute to performance (Climate Solutions) and those that can’t as much (Performance Technologies).

Risks

AI

As most of Modine’s growth, and a lot of its margin expansion, comes from supplying data centers with cooling solutions, the growth and adoption of data centers – and by that AI and data transfers – is very important for Modine. Although the company is still a “good business” without data center exposure, it is priced very ambitiously, and it is impossible for the company to achieve its goals or the market estimates without continued data center demand.

Valuation

Should the company overestimate the growth and profitability it can deliver, it might lead to relative or perceived underperformance on the company’s side, possibly leading to the stock price suffering. This is also a possible scenario should growth or profitability come to a sudden halt.

End-market concentration

Automotive and data centers have different roles for MOD, the former making up the majority of MOD’s existing revenue and the latter being responsible for the majority of the company’s growth and profitability. This means end market concentration risk for investors, as automotive is cyclical and data center demand is hard to predict over the medium term.

Mitigation

A possible way to mitigate valuation risk is to only initiate a partial position in MOD, as drops in its share price – rational or not – are possible and, depending on the reason, could be taken advantage of by quick-moving investors.

Turning to AI as a risk; for investors who are weary of the data center and AI boom, tracking the exposure to these themes across their entire portfolio and actively managing it likely makes the most sense. In my opinion, as the runway is still uncertain for most AI applications, prudent portfolio management implies this regardless.

Conclusion

Although I believe there is a good chance Modine can outperform over the medium term due to high growth, relative to what investors would be paying for it, I rate Modine a “Hold”. This is because I am concerned about the underlying market exposure and performance drivers being highly concentrated. Further, these performance drivers might possibly come to a halt abruptly, should major spenders see too little benefit. Beyond that, I have an aversion for companies that don’t have a very dominant and well-defined moat source as this makes defending and growing the business much harder and increases risk.

Investors who have more belief in AI and data centers continuing their path of high growth over the medium to long term will likely find good value at the current price.

Still, I advise investors to keep an eye on the company’s moat and end markets, as I see those as the highest risk to growth and profitability – which are the fundament the company’s performance is built on. With those concerns, I don’t see MOD as a core position to any portfolio, despite the, in my opinion, good prospects for the company.

However, should the share price drop to more attractive levels, providing a larger margin of safety, I can see Modine be an attractive way to play the AI boom for myself.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Although I aim to always give actionable recommendations based on doing my research to the best of my abilities, this should never be seen as investment advice – please never skip doing your own research.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Modine Manufacturing: Data Center Demand Is Driving Breakneck Margin Expansion appeared first on Up2info.com.

• Modine aims to triple data center cooling revenue to $1.1 billion in three years.
• The strategic 80/20 shift, focusing on high-growth, high-margin businesses, has improved financials, with significant growth in MOD’s Climate Solutions segment.
• Acquisitions like Scott Springfield Manufacturing enhance the Company’s capabilities and competitive advantage in the high-growth data center cooling market.
• Despite potential market risks, Modine’s expanding margins and free cash flow growth make it a buy for long-term investors.

Investment Thesis

Modine Manufacturing’s (NYSE:MOD) management sees the potential to generate roughly $1.1 billion in data center cooling revenue within three years. That would triple its current data center sales and nearly double its current total Climate Solutions revenue. It would also put the company somewhere in the range of generating $3.3 billion annually. The incredible growth and continued acceleration of data center cooling sales, a strategic acquisition that, I believe, has given Modine a potential moat or at least a strong competitive advantage, and expanding margins give me confidence that the company can be a winner in the data center cooling space. If Modine can accomplish the type of revenue growth that management speaks about, the stock could be a great value today for long-term investors. After rating MOD a hold in my last article, I now consider Modine a buy and have opened a starter position in the company.

Improving Financial Outlook

Modine is undergoing a strategic shift, which it calls its 80/20 principle. MOD’s 80/20 changes caused a meaningful improvement in its financial trajectory. The company is divesting from underperforming businesses and shifting its focus into higher growth and higher margin businesses. Segment revenue has flipped from being driven largely by Performance Technology to now being driven by Climate Solutions. This is a very positive sign for continued margin expansion. The Climate Solutions business includes data center cooling, which generates significantly higher gross and operating margins. This is the area of the business I am focusing on for the time being, as Modine’s management has mentioned that its target for its data center cooling business is roughly $1.1 billion in about three years’ time. If this happens, I believe Modine can rival the current free cash flow margins of Vertiv (VRT) and Trane Technologies (TT). FCF margins of 13% could support impressive shareholder returns.

In the table below, you can see that Modine has been able to achieve impressive growth in gross profit and margin, and adjusted EBITDA and margin. Its Climate Solutions (CS) segment experienced incredible revenue growth (24.6% YoY in Q1) and gross profit (33.0% in Q1). The Performance Technologies (PT) segment is being shrunk by selling off underperforming business, however, despite a decline in PT sales, Modine grew PT gross profit by 22.4%, showing increased efficiency from its 80/20 changes. Modine expects a flattish revenue outlook, with higher margins in its PT segment and continued acceleration in its CS segment.

Adjusted EBITDA is a more appropriate measure of Modine’s recent growth due to a reversal of an impairment charge in 2023 and the unwinding of some of its legacy automotive businesses. Adjusted EBITDA margin has expanded from 7.8% in Q1 2023 to 15.3% in Q1 2025. The key thing to look for in Modine’s operational performance will be the magnitude of the shift in revenue towards data center cooling solutions and continued margin expansion.

Growth in Data Center Sales and Expanding Margins

Despite exiting some of its Performance Tech businesses, Modine continues to grow total revenue on the strength of its CS segment, driven by an acceleration in data center cooling revenue.

A good amount of Q1 data center sales growth comes from the Scott Springfield Manufacturing (SSM) acquisition; however, during the Q1 call, management stated that organic data center growth nearly doubled YoY. Modine acquired SSM to gain access to a technology that it couldn’t provide. Now, with the two companies operating together, the benefits of both should kick in. The integration of SSM and its custom air handling units (AHUs) will expand Modine’s capabilities and allow it to better serve hyperscale data centers, strengthening its position in a high-growth vertical. It also gained Modine access to new customer relationships by adding a hyperscale customer, potentially opening the door to new large data center customers now that the company has a seat at the table. These relationships may be one of the most important competitive advantages in the data center cooling market, as significant switching costs may be associated with hybrid data center cooling agreements. Management has essentially told us that the two companies combined will be stronger than each one separately.

Data center cooling sales have more than 6x’d since Q1 of 2022, with quarterly sales rising at a CAGR of 85.4% over the two-year period shown below. As data center sales have grown, Climate Solutions gross margins have improved from 20.6% to 28.2%, and total gross margin has expanded from 15.4% to 20.4%. Data center sales now make up 24.4% of total revenue. This figure was only 5.2% in the same period three years ago.

The chart below further illustrates the relationship between data center sales and gross margins. As data center sales (red line) have grown from $25.5 million to $162.6 million, gross margin (green line) has significantly expanded and the share of revenue coming from data center sales (orange bar) has exploded higher.

How long will this growth continue? Capex into data center new builds and expansions is still ongoing. These are large projects that take time to plan, fund, approve, and build, this process should continue to play out for several years at least. Dominion Energy (D) recently said that new large data centers requiring more than 100 megawatts of electricity would face up to seven-year delays due to the lack of electrical infrastructure support. Importantly, this will not affect projects already in the pipeline. Dominion serves electricity in Virginia, one of the more important places in the USA for data centers. In my article about NextEra Energy (NEE) in June, part of my thesis revolved around the long-term growth pipeline for data center build outs. Perhaps not coincidentally, NEE says that it expects renewables to grow about 3x over the next seven years as compared to the prior seven-year period. This growth in renewables should help support the ability to continue building large data centers beyond the seven-year period Dominion mentioned.

The other thing that should support the ability to build data centers despite the current and near-term limitations of the electrical grid is the adoption of liquid cooling solutions for data infrastructure. For instance, research and industry articles have discussed how advanced cooling technology will help data centers become more efficient and that liquid cooling is a critical part of this shift. This demand should provide an opportunity for Modine to continue building on its recent success in building a company with the capability to offer a full suite of data center cooling technology.

Free Cash Flow Analysis

In Q1, MOD’s FCF (defined simply as OCF minus Capex) was $13.7 million, while TTM FCF was $113.2 million. However, TTM FCF numbers may not be the best measure of the company’s earnings ability because MOD has made significant investments in growth and accelerated revenue from its data center cooling segment. Because of this, the cash flow collection from its data center revenue may be somewhat delayed for now.

In Q1, OCF was negatively impacted by working capital, with changes in accounts receivable (-$18.1 million) and other net operating assets (-$32.6 million) combined to decrease OCF by $50.7 million. On the flip side, MOD only benefitted from $20.6 in other working capital items, such as favorable changes in inventory, accounts payable, and other net operating assets. I don’t like to make bold assumptions about working capital unless I have a really firm grasp of a company’s accounting. Still, in the case of Modine, I feel confident in its potential to improve OCF in the coming quarters because data center cooling sales are accelerating and driving margin expansion. Additionally, FCF was impacted by larger than usual capex related to acquisitions and investments in growth. Capex in Q2 was $26.8 million.

We can count Capex against MOD’s cash flows, but the Capex used to integrate Scott Springfield and TMGCore should be viewed a long-term investment rather than an immediate expense, despite its accounting treatment. Since these are not capitalized, they impact earnings and free cash flow today. However they represent long-term growth investments that, under different accounting treatment, would be capitalized and expensed over their useful life period. Over time, as Capex decreases, earnings and free cash flow should theoretically improve, assuming these acquisitions contribute to growth. Thankfully, there are at least early indicators that the SSM acquisition already is.

Returns on Invested Capital and Capital Employed

Modine has shown its increasing efficiency through two very important measures, ROIC and ROCE. These capital efficiency metrics will go a long way in indicating if the company is improving the returns it gets on its investments in acquisitions, Capex, and R&D. The company has exhibited healthy and improving ROIC and ROCE, as seen below.

Companies that maintain healthy capital efficiency metrics (particularly ROIC and ROCE) are more likely to deliver strong shareholder returns. Modine has done this, and this should support improving free cash flow generation in the future.

FCF Potential

Perhaps our best comps are Vertiv and Trane Technologies. VRT and TT are different businesses. Trane is established and very diverse, like Modine is. With different business segments that make data center cooling a growing part of its business but not yet a major source of revenue. Vertiv is the faster growing counterpart to Modine, but differs in that it is focused mainly on advanced cooling systems solutions. With the emergence of data center cooling and liquid cooling as a source of revenue for Modine, I see the business aiming to be somewhere between Vertiv and Trane, with a diversified model and an increasing reliance on data center cooling.

Both TT and VRT hold TTM FCF margins just north of 13%. MOD’s TTM FCF margin is only 4.6%, with a peak of 6.4% as of the end of fiscal Q3 of 2024 (12/31/2023). Given the expansion of MOD’s gross and operating margins and the fact that a secular growth trend and rightsizing of its business is pushing this expansion, I see 13% as a reasonable target for FCF margins.

If Modine can get to a 13% FCF margin within the next few years, that would likely make the stock pretty cheap right now. Margin expansion could be supported by continued growth in data center sales, lower integration costs and the synergies or benefits from its recent acquisitions, particularly the Scott Springfield acquisition.

Valuation

If we use a basic reverse DCF calculator and Modine’s TTM FCF of $113.2 million, a terminal growth rate of 3.0%, and a discount rate of 12.0%, Modine needs to grow free cash flow at 22.6% over a ten-year period. I chose a 12% discount or hurdle rate because I believe that would be a market-beating stock. The terminal rate of 3% while higher than GDP, appears to be reasonable due to the potential tailwinds associated with data center cooling and HVAC/R markets.

The simple reverse DCF might overstate Modine’s need to grow free cash flow from its current margins. What if the company can continue to dramatically expand its margins in the next year or two?

Looking at Modine’s recent restructuring for growth and efficiency and the explosion in data center sales, the company does not yet appear to be optimized for free cash flow generation. Let’s go back to my assumption that Modine has the potential to match the 13.0% FCF margin that TT and VRT hold.

Now, let’s conduct a valuation exercise, pretending that Modine is already optimized for a free cash flow. I believe 7% to 13% is an appropriate range for MOD’s medium-term FCF margin. If we assume that the company was already optimized for FCF margin and that the margin remained steady for ten years, we can estimate the revenue growth rate required for MOD stock to be fairly valued using a reverse discounted cash flow model. I want to stress that this is not an accurate measure of intrinsic value, just an estimate of what would be required under more optimal profitability.

If FCF margin were already 13%, given its twelve-month revenue run rate of $2,646 million in revenue, Modine would be generating $344 million in FCF and only need to grow revenue at a 6.8% CAGR to be trading at its estimated intrinsic value. If Modine were optimized for 10.0% FCF margins, the required revenue growth rate would be 12.1% annually, and at 7.0% FCF margin, Modine would have to grow revenues at a 19.2% CAGR. Each model uses a 12.0% discount rate and 3% terminal growth rate.

I need to explicitly state that this model makes assumptions that could look ridiculous in either direction in the future, and should be considered a tool to evaluate the potential valuation of Modine under optimal profitability that has yet to be attained.

Combining the two models used points to, Modine as a potential market-beating performer in the coming years. Because I believe margins will continue expanding dramatically in the coming years and revenue will grow from here, I think the potential lies somewhere between the traditional reverse DCF model used and the 3-scenario optimized for free cash flow reverse DCF model I created.

Given the expansion of margins that Modine is seeing with the explosion in data center cooling sales, it seems reasonable to assume margins continue to expand. The question is, how wide can they expand? That may depend on Modine’s ability to create or maintain a moat.

Modine’s Moat

My willingness to put faith into the long-term investment thesis for Modine is dependent on the company’s ability to create a moat. In MOD’s case, competitive advantages could come from large customer relationships, patented technology, and switching costs. MOD is experiencing rapid growth from its advanced cooling division, led by incredible growth in its data center cooling business and bolstered by the acquisition of SSM.

It’s hard to determine if Modine actually has the potential to develop a moat in liquid cooling. I don’t think this is a winner-take-all industry, but it’s important to determine if MOD has the potential to at least gain and maintain a leading position in the advanced cooling market.

The market has several key players, such as LiquidStack (with investments from TT) and Vertiv, as well as a host of other competitors, some of whom lack the advanced capabilities of those mentioned above. The market is also experiencing massive capital inflows from big tech. This bodes well for the liquid cooling industry and Modine, but it also might invite increased competition. Because of this, it is important for Modine to hold some kind of moat to maintain its leading position in the market.

To me, a moat is such a strong competitive advantage that it can be sustained over time, even when attacked by other companies. The sources of competitive advantages for Modine could come from the amount of R&D required to enter the liquid cooling market. This could limit entry into the space for new competitors and discourage larger, diversified HVAC/R companies from getting directly involved in the process. Another competitive advantage might come from relationships with data center providers or one or two hyperscale companies actively spending massive amounts of money to build their data center capabilities. Switching from one cooling provider to another may require steep switching costs in the way of expense and downtime.

Conclusion and Risks

I believe Modine has strong competitive advantages in all of the forms cited above, but I need to learn more about how sustainable this may be. This is what prompted me to take a starter position in the company following its recent pullback below $100 per share.

The risks to my thesis are that the data center cooling market lacks sustainable growth if high-performance computing applications fail to deliver adequate returns on investment for hyperscalers. However, it appears that these investments are being made and will not slow down for several years. Once those investments are in place, I believe Modine’s growth inflection will have taken place.

I understand the risk that MOD’s stock price could pull back further as market sentiment may sour from here, especially considering the slowing of growth rates seen in Nvidia (NVDA) and the realization that generative AI stocks aren’t going to grow linearly.

However, after digging deeper into MOD’s investment thesis, I see greater potential for the company to continue expanding margins and growing free cash flow, and I believe the market may not fully realize this potential right now. I rate the stock a buy for long-term investing strategies and would consider upgrading to a strong buy if the share price falls further without my investment thesis being compromised.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of MOD, TT, NEE either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Modine Looks Like A Buy After Further Analysis appeared first on Up2info.com.

• Modine Manufacturing stock has surged by 478% since I initiated its coverage on SA, significantly outperforming market indices. Initially rated bullish, my stance shifted to “Hold” despite the continued rally.
• I like what I see in Modine’s segment performance in Q1 FY2025. The management anticipates 40-50% organic growth in the data center business for the year.
• Notably, Modine’s leverage ratio improved from 1.2x to 1.1x in the past year. The FCF generation capacity looks great as well.
• Although the momentum is still there, I believe MOD’s potential is likely capped as the stock’s valuation expanded too much, in my opinion, by almost every metric.
• I have decided to reiterate my “Hold” rating today.

Into & Thesis

I’ve been covering the Modine Manufacturing (NYSE:MOD) stock here on Seeking Alpha since November 2022. Since then, the stock has risen by an impressive 478%, which is phenomenal compared to any broad market index. However, my bullish rating shifted to “Hold” in mid-April of 2024. In my last update (July 2024), I noted significant opportunities Modine had in data centers after it strategically acquired TMGcore and Scott Springfield and enhanced cooling technology and capacity. On the other hand, I assumed that MOD’s rally had gone too far: I calculated that even if MOD beats its FY2025 EPS consensus by 10%, the fair value of the stock would be ~$108/share – a bit below the stock’s price at the time.

Despite that conclusion of mine, the MOD stock continued to grow further, outperforming the S&P 500 index.

Although the momentum is still there, I believe MOD’s potential is likely capped as the stock’s valuation expanded too much, in my opinion, by almost every metric.

Q1 FY2025 Results Analysis

Modine Manufacturing demonstrated great performance during Q1 FY2025: its net sales increased by 6.33% YoY to $661.5 million, driven by both organic expansion and acquisitions, partially offset by $24 million in divestitures and planned 80/20 initiatives. As the IR materials say, the consolidated organic sales grew by 4% YoY, which looks great amid the ongoing margin expansion – gross profit margin expanded from 20.6% to 24.6%, a 400 basis point improvement driven by “80/20 initiatives, favorable sales mix, and material cost reductions.” MOD’s EBIT as a percentage of sales increased from 10.7% to 11.2%, while adjusted EBITDA grew by 25% YoY to $100.9 million (with the margin improving by 240 basis points to 15.3%). So all that led to an adjusted EPS increase of ~22.35% (from $0.85 to $1.04) – way more than Wall Street expected for the quarter:

I like what I see in Modine’s segment performance in Q1 FY2025.

The Climate Solutions segment had another exceptional quarter, significantly benefitting from the Scott Springfield and Napps acquisitions. CS’s Data Center sales saw a remarkable increase of 138% YoY, with new data center capacity expected to come online later in the year. The management says Modine is responding to the growing demand for hybrid data center solutions that combine air and liquid cooling products “to optimize cooling efficiency and minimize energy consumption.” Modine is also launching a new Cooling Distribution Unit (CDU) that should integrate with their other data center products, with first shipments anticipated in Q4 FY2025. I definitely like the fact that the Data Centers have now completely offset any weaknesses in the Heat Transfer Products sub-segment (the sales there are down over 20% YoY in Q1) – diversifying and re-focusing on the higher-margin and higher-growth areas does its job; the 80/20 program initiatives seem to be working well.

Looking at the Performance Technologies segment, I see that its sales volumes keep suffering driven primarily by “German divestitures and lower end market demand across auto”. On the other hand, the segment is experiencing a strategic shift and evolving product mix, which is driving substantial margin improvements: amid organic sales being down 1% YoY, the adjusted EBITDA margin went up by 25% (+390 b.p. in margins, YoY). The company also announced the launch of the Evantage Advanced Cabin Climate System, “designed to provide cabin heating and cooling for commercial, off-highway, and specialty electric vehicles.” So as Modine continues to reduce costs related to legacy businesses and is exploring opportunities to accelerate exits where possible, I think that today’s temporary operational weaknesses in select business areas shouldn’t impede overall growth in earnings and free cash flow going forward.

By the way, speaking about Modine’s ability to generate FCF: last quarter they made a positive free cash flow of $14 million, which I believe was a promising start to the fiscal year. This cash generation contributed to a $9 million reduction in net debt, bringing the total to $363 million as of June 30. Notably, Modine’s leverage ratio improved from 1.2x to 1.1x for the past year, which is also a great sign not just for the business’s creditworthiness, but also for the stock’s valuation (less leverage typically leads to higher valuation premium to peers).

On the earnings call, we found out that the Performance Technologies segment may see a dip in Q2 and Q3 “due to seasonal factors and softness in off-highway markets”, but on the other hand, the company raised its full-year guidance, with Climate Solutions expected “to have relatively consistent revenue for the rest of the year”:

It’s encouraging to see that the management expects 40-50% organic growth in the data center business for the full year, while the new manufacturing capacity is being “added in line with the market CAGR over the next 3 years”. So based on what I see, it’s clear to me that the business is developing very actively, which, against the backdrop of the continuation of the 80/20 initiative (they’re still targeting ~$100 million of revenue rationalization each year), could lead, if not to an acceleration, then at least to the maintenance of high EPS growth rates over the next 2-3 years.

But what about Modine’s valuation?

Valuation Update

Modine stock is now trading at one of the most expensive multiples in its public history, while the other peers are clearly struggling to maintain their valuation premium. According to Seeking Alpha Premium, Modine is currently trading at ~31.6x its projected EPS for FY2025 – this is >2.5x more compared to Super Micro Computer (SMCI), which trades at only 12.75x next year’s earnings. However, SMCI has a more specific focus on data centers, unlike Modine Manufacturing, so I believe the former should have a larger premium.

Modine’s overvaluation is also evident from the EV/EBITDA and EV/Sales multiples, which exceed 17x and 2.5x, respectively, based off of next year’s consensus numbers – which is quite high on an absolute basis.

But of course, there’s a logical explanation for this: MOD’s margins and overall profitability ratios have skyrocketed in recent years, while the leverage ratio (D/E) continues to fall (which, as I wrote above, also provokes the emergence of a valuation premium).

At the same time, in my opinion, the market is already pricing in the lion’s share of future growth, the prospects for which I write about in the first part of my article today. According to today’s consensus estimates, MOD’s 3-year EPS CAGR should be 14.6%, which looks pretty impressive.

I’m not saying that these growth rates will be impossible to achieve – I’m just saying that they may be already in the stock price. Modine has already reached its all-time highs in margins, and while other companies are struggling to increase (or at least maintain) their marginality levels, MOD’s 80/20 strategy continues to work. But how long the positive effect will last, nobody knows. I think the earnings per share growth rate should begin to decline by the end of 2025 or early 2026 as the company has reached a consistently high margin and its sales don’t expand by much; all that should theoretically lead to multiple contraction. But that’s just my guess, of course.

The Bottom Line

I really like the way the company has grown and developed over the last few quarters. Obviously, my mid-April 2024 downgrade was a bit premature, as the Q1 FY2025 report made it clear that cost optimization efforts keep going amid attempts to settle on the data center market. However, I don’t like the multiples at which the stock is trading today: 17x EV/EBITDA seems too high to me, even taking into account that EBITDA margins continue to rise. Perhaps the stock’s upside potential is not yet exhausted – the momentum factor looks stunning.

However, from a fundamental analysis perspective, I fear that MOD is close to a natural plateau in terms of margins. If so, the current EPS consensus is probably too optimistic, which could put pressure on the stock in the medium term. With this in mind, I have decided to reiterate my “Hold” rating today.

Thank you for reading!

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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The post Modine Manufacturing: Confirming My ‘Hold’ Rating appeared first on Up2info.com.

• MOD remains a Buy after the recent meltdown/ recovery, thanks to the timely investments and strategic capacity expansions during the data center capex boom.
• Combined with the accretive M&A activities and healthier balance sheet, we believe that the company remains well positioned to report robust profitable growth ahead.
• MOD’s strong earnings results and raised guidance also strengthen its Buy investment thesis.
• With the earnings season still ongoing and the stock unable to break out of its resistance levels, readers may want to observe its movement for a little longer before adding.

We previously covered Modine Manufacturing Company (NYSE:NYSE:MOD) in June 2024, discussing its robust prospects, thanks to the growing demand for zero-emission/ high-density cooling solutions for data center/ EV platforms.

This was significantly aided by the divestiture of low growth/ low margin businesses and the acquisition of liquid cooling technologies, allowing the company to tap into the next-gen Data Center infrastructure trends, triggering our Buy rating upon a moderate retracement.

Since then, MOD has charted new heights in the $120s before drastically pulling back, along with other high growth/ semiconductor stocks/ wider market as we enter the Summer Doldrums with August typically being a slower month.

Even so, we are reiterating our Buy rating here, thanks to its double beat FQ1’25 earnings call, raised FY2025 guidance, growing opportunities/ capacity in the data center segment, and healthier balance sheet, which have triggered the stock’s recovery by +19% afterwards.

While the stock may be trading at a slight premium to our updated fair value estimates, we believe that it continues to offer a compelling investment thesis for growth oriented investors.

MOD’s Investment Thesis Is Even More Compelling After The Recent Pullback

MOD YTD Stock Price

MOD has had a volatile past few weeks indeed, attributed to the ongoing market correction observed in the semiconductor market.

At the same time, with the stock well out performing its thermal management peers and the wider market, the recent pullback has been well warranted, in our honest opinion.

If anything, MOD’s double beat FQ1’25 earnings call, with revenues of $661.5M (+9.6% QoQ/ +6.2% YoY) and adj EPS of $1.04 (+35% QoQ/ +22.3% YoY) continues to imply the robust hyperscaler demand for its thermal management products/ solutions.

Much of its tailwinds are attributed to the Climate Solutions segment with revenues of $357.3M (+35% QoQ/ +10% YoY) and expanding gross margins of 28.2% (+2.3 points QoQ/ +1.8 YoY), due to the higher sales and ASPs – resulting in +138% YoY increase in sales for data center cooling products.

These numbers well balance the ongoing correction observed in the Performance Technologies segment with revenues of $309M (-10.2% QoQ/ -9.9% YoY), attributed to the softer automotive demand.

Even so, we are not overly concerned indeed, since it is apparent that MOD’s management continues to deliver a favorable sales mix as observed in growing bottom-lines, with the recent Scott Springfield acquisition (indoor air cooling in hyperscale and colocation data center) being highly strategic and accretive to its existing portfolio.

The same has been observed in the raised FY2025 midpoint guidance to net sales growth of +8.5% YoY and adj EPS growth to $3.80 (+16.9% YoY), up from the original midpoint guidance of +7.5% YoY and $3.70 (+13.8% YoY), respectively.

These numbers are impressive indeed, partly attributed to MOD’s higher capital expenditures of $100.2M over the last twelve months (+80.8% sequentially).

This strategy has already allowed the management to drastically expand its data-center related capacity by double on a YoY basis, thanks to the power hungry server racks requiring highly efficient cooling solutions.

Combined with the “long term strategy of building out capacity for $1 billion,” it goes without saying that MOD remains well capitalized to report robust profitable growth over the next few years, significantly aided by the positive Free Cash Flow generation and healthy balance sheet.

We maintain our belief that generative AI and the resultant data center capex boom remain sustainable despite the recent meltdown observed in the stock market, with the world’s largest semiconductor foundry by market share, Taiwan Semiconductor (TSM), still raising capex to capture growth opportunities.

The same has been reported by data center REITs, such as Digital Realty Trust (DLR) and American Tower (AMT) in their latest earning calls, as they seek to incrementally increase their build outs “to maximize sellable capacity on the back of ongoing record demand.”

As a result, we believe that Gartner’s projections of the global spending on public cloud services growth from $561B in 2023 to $823B by 2025, expanding at a CAGR of +21.1%, with “AI-related workloads driving a significant portion of this growth,” have not been overly aggressive indeed, with these developments continuing to highlight the robust multi-year data-center investment period.

So, Is MOD Stock A Buy, Sell, or Hold?

MOD YTD Stock Price

For now, MOD has already recovered most of its recent losses after the excellent FQ1’25 earnings call, while appearing to retest its previous resistance levels in the $117s.

For context, we had offered a fair value estimate of $89.20 in our last article, based on the FY2024 adj EPS of $3.25 (+66.6% YoY) and the FWD P/E valuations of 27.47x.

Based on MOD’s raised FY2025 adj EPS guidance of $3.80 at the midpoint (+16.9% YoY) and the stable P/E valuation of ~27x on a YTD basis, it appears that the stock is finally trading nearer to our updated fair value estimate of $102.60.

There remains an excellent upside potential of +28.5% to our reiterated long-term price target of $151.30 as well, based on the stable consensus FY2026 adj EPS estimates of $5.51.

As a result of the still attractive risk/ reward ratio, we are maintaining our Buy rating for the MOD stock here.

Risk Warning

On the other hand, readers must note that MOD’s short interest continues to grow to 6.56% at the time of writing, up from the start of the year at 4.2% and a year ago at 2.2%, worsened by the ongoing profit taking and market volatility.

With the calendar Q2’24 earning season still ongoing and the stock seemingly unable to break out of its previous resistance levels in the $117s, there may be moderate uncertainty in the near-term as the CBOE Volatility Index remains elevated.

At the same time, while MOD has projected inline FY2025 capex and Free Cash Flow on a YoY basis, readers must also monitor the management’s ongoing acquisition sprees, with any further M&A activities potentially triggering higher debts/ interest expenses in an elevated interest rate environment – triggering potential impact on its bottom-lines.

Therefore, while we maintain our optimism surrounding its robust long-term prospects, investors may want to time their entry point upon a moderate retracement to its previous trading ranges of between the $108s to $98s for an improved margin of safety.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The analysis is provided exclusively for informational purposes and should not be considered professional investment advice. Before investing, please conduct personal in-depth research and utmost due diligence, as there are many risks associated with the trade, including capital loss.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Modine Manufacturing: Data Center Boom Remains A Tailwind – Reiterate Buy appeared first on Up2info.com.

• Since November 2022, Modine Manufacturing stock has risen by an impressive 462%, which is phenomenal compared to any broad market index.
• Modine’s management sees significant opportunities in data centers, strategically acquiring TMGcore and Scott Springfield and enhancing cooling technology and capacity.
• I think the rally has gone too far. Despite the clear fundamental growth drivers, the current valuation of the Modine stock can’t be justified by the firm’s expected EPS growth.
• Even if we assume that the company will beat the FY2025 EPS consensus by 10%, the fair value will be approximately $108 per share, which is below the current stock price by ~8.5%.
• I’ve decided to leave my rating unchanged at ‘Hold’ ahead of the company’s report for Q1 FY2025.

Intro & Thesis

I’ve been covering the Modine Manufacturing (NYSE:MOD) stock here on Seeking Alpha since November 2022. Since then, the stock has risen by an impressive 462%, which is phenomenal compared to any broad market index. However, my bullish rating shifted to neutral in mid-April of this year (despite that, the MOD stock continued to grow further).

Anyway, I believe the thesis of my last article remains relevant: I think the rally has gone too far. Despite the clear fundamental growth drivers, the current valuation of the Modine stock can’t be justified by the firm’s expected EPS growth in future periods.

Why Do I Think So?

In May 2024, Modine reported its Q4 of fiscal 2024 with revenue of $603.5 million, down 2% YoY because of the $24.2 million impact from businesses divested during the quarter (organic sales were basically flat YoY). Nevertheless, the gross profit surged by 22% YoY with the gross margin improving by 420 b.p. to 22.4% due to the “ongoing 80/20 initiatives, higher average selling prices, lower material costs, and a favorable sales mix”, the management commented in the press release. The SG&A costs ticked down a bit, but because of higher restructuring costs (primarily related to “headcount reductions and consolidation of technical services”), the EBIT amounted to $46.8 million, down 3.5% YoY. However, the adjusted EBITDA, which excludes restructuring expenses and other specific charges, increased by 20% to $78.8 million compared to $65.5 million in the prior year. So as a result, the firm’s net earnings per share amounted to $0.77, plus 15% to what we saw last year. The bottom line result beat the consensus figure marginally by 1 cent, while the top line slightly missed by less than $2 million:

In general, despite the mixed results, looking at the long-term development, it’s impossible not to notice that Modine has continued its qualitative growth and expansion driven both by both top-line expansion and improved margins, a trend I have consistently highlighted since I began covering the company here on SA.

The company’s rapid expansion is evident in both its improving margins and overall revenue growth maintained across both the Climate Solutions Segment (CSS) and the Performance Technologies Segment (PTS). In Q4 CSS’ revenue increased by just 1%, but there was an uptick in demand for data center cooling products after the acquisition of Scott Springfield Manufacturing on March 1, 2024 (partially offset by “lower sales of heat transfer products, hence the modest growth rate”). But again, the GP margin went up by 270 b.p. YoY, leading to EBIT soaring by 15% YoY. On the other hand, PTS’s revenue decreased by 5% YoY due to divestitures, but on an adjusted basis PTS would have grown by 2% organically, driven by “higher sales to off-highway and specialty vehicle customers, partially offset by lower sales to automotive customers”. The segment’s GP margin improved even more significantly – by 600 b.p., to 20%.

Management definitely sees great opportunity in the development of data centers as during the past few quarters Modine strategically strengthened its core operations acquiring TMGcore and Scott Springfield, thereby bolstering its data center cooling technology and capacity. Simultaneously, following the 80/20 principle, they divested non-core assets, including automotive operations in Germany and coatings businesses in the US, aligning their portfolio with high-margin, high-growth markets. And as we could see from Q4 results, this strategy is indeed working, as margins continue to grow. At the same time, this business shift is taking place against the backdrop of a relatively stable balance sheet condition: the net debt increased by only $86 million (the acquisition of Scott Springfield is to blame here), but on the other hand, we see from the debt-to-equity ratio that Modine’s leverage hasn’t actually increased that much.

While Modine spent on CAPEX a bit more than they initially anticipated due to the purchase of a new UK manufacturing facility, the company anyway generated $127 million of free cash flow in Q4 – that’s an improvement of $70 million compared to the prior year.

I think it’s logical to assume that data centers will be the main growth driver for at least several years into the future. After the company acquired new assets and divested some old ones, I believe its updated revenue structure will lead to more stable growth rates than before.

Having such a solid performance behind its back, the management provided forecasts for the 2025 fiscal year, expecting further expansion in sales and anticipating adjusted EBITDA in the region of $365 million to $385 million, which would correspond to an increase of 20% compared to FY2024. They also aim to meet or exceed the FCF of 2024 thanks to a favorable impact from “higher employee compensation, pension contributions, restructuring costs, and potential cash advances from data center projects.”

From what I see today, the market has faith in management and expects the company to grow its EPS at a CAGR rate of ~14.1% over the next 3 years. This is fast enough when we look at historical expansion, especially compared to pre-COVID norms. I think these growth rates are feasible given that the data center revenue share ticks up after the newly acquired assets are fully integrated into the existing business ecosystem.

As for the shorter-term outlook, I don’t have the management’s guidance specifically for the first quarter of the fiscal year 2025 (the firm is set to report for it on July 31, 2024). But I believe Modine Manufacturing has a chance to beat the consensus because it looks relatively moderate – the market anticipates a small drop in the company’s EPS on a year-over-year basis. I think that if the business momentum we saw at the end of the 2024 fiscal year continues, even considering seasonality, there’s a good chance of beating.

What confuses me, however, are the relatively high valuation multiples MOD trades at as of today.

According to Seeking Alpha Premium, Modine Manufacturing is trading at almost 32x its projected earnings per share for FY2025 – this is almost comparable to Super Micro Computer (SMCI), which trades at ~33x next year’s earnings. However, SMCI has a more specific focus on data centers, unlike Modine Manufacturing, so I believe the former should have a larger premium.

Also noteworthy is the fact that Modine doesn’t have the same level of multiple contraction projected for the next few years ahead as we see in the case of Super Micro. This primarily stems from the fact that Modine’s EPS figures are projected to grow significantly weaker than its more data center-centric peer.

Based on this, I conclude that, most likely, Modine Manufacturing, despite all its strengths, has simply gone too far in terms of valuation. I think a fair value multiple for MOD is in the region of 25-28x. This implies an overvaluation of the current share price by about 20% (if the current consensus in terms of EPS is correct). Even if we assume that the company will beat the FY2025 EPS consensus by 10%, the fair value, will be approximately $108 per share, which is below the current stock price by ~8.5%.

The Bottom Line

The dream of every investor in small and mid-cap companies is to find a company with clear prospects for sales growth that is simultaneously making active efforts to stabilize and expand margins. This is exactly the case with Modine Manufacturing. In my opinion, it’s a very promising company, but whose valuation has gone too far thanks to the strong rally in recent months. I see no reason to pay 30 times net earnings for this company, despite the qualitative change that the 80/20 strategy has brought recently, and the growth potential through the development of the data centers business.

Therefore, in my opinion, Modine should be trading at a discount compared to companies like Super Micro Computer, which is more specialized in data centers. My calculations lead me to the conclusion MOD should only be considered for purchase after a noticeable correction from the current price level. Therefore, I’ve decided to leave my rating unchanged at ‘Hold’ ahead of the company’s report for Q1 FY2025.

Thank you for reading!

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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The post Modine Manufacturing: Entering Unsustainable Territory Now appeared first on Up2info.com.

• Modine Manufacturing Company has enjoyed a rapid upgrade from a small-cap to medium-cap status within a short span of one year, thanks to the aggressive 80/20 initiative and the resultant profitable growth.
• At the same time, the EV and generative AI boom have driven the demand for zero-emission/ high-density cooling solutions on multiple platforms, triggering long-term growth opportunities.
• This is significantly aided by the divestiture of low growth/ low margin businesses and the acquisition of liquid cooling technologies, tapping into the next-gen Data Center infrastructure trends.
• With Modine Manufacturing also reasonably valued compared to its thermal management/ power peers, we believe that there remains great upside potential ahead.
• Naturally, this is with the caveat that investors wait for a moderate retracement for an improved margin of safety as short interest grows and insider selling intensifies.

MOD’s Profitable Growth Prospects Remain, Thanks To The Promising 80/20 Initiative

Modine Manufacturing Company (NYSE:MOD) is another stock that has enjoyed a rapid upgrade from a small-cap to medium-cap status within a short span of one year.

Most of the tailwinds are attributed to the management’s aggressive 80/20 initiative introduced in June 2022, with the aim of delivering accelerated top-line growth at a normalized 5Y CAGR of +8% and expansion in adj EBITDA margins from 7.7% in 2022 to ~15% in 2027.

This is on top of MOD’s well-diversified offerings across thermal management in commercial vehicles, automotive, and data center markets, along with industrial power generation/ transmission.

This is an important point indeed, since the EV and generative AI boom have driven the demand for zero-emission/ high-density cooling solutions on multiple platforms, one which MOD specializes in.

As a result, it is unsurprising that MOD has reported a bottom-line beat in its FQ4 ’24 earnings call, with revenues of $603.5M (+7.4% QoQ/ -2.3% YoY) and adj EPS of $0.77 (+4% QoQ/ +14.9% YoY) released on May 22, 2024, with FY2024 numbers of $2.4B (+4.8% YoY) and $3.25 (+66.6% YoY), respectively.

Readers must note that the top-line miss is attributed to the management’s strategic divestiture of

“three automotive businesses in Germany that manufactured parts principally for the internal combustion engine in the European market, as well as two coatings aftermarket businesses here in the US,”

with the aim of shedding low growth/ low margin businesses.

This is on top of the decline in sales of Heat Transfer products to $433.4M (-14.2% YoY), attributed to the EU regulatory changes and delays in revenue recognition in FY2024.

Otherwise, MOD has reported a robust growth in the Air-Cooled segment to $674.18M (+4.7% YoY), Liquid-Cooled segment to $505.63M (+4.7% YoY), and Data Center Cooling segment to $288.93M (+57.1% YoY) in the latest fiscal year.

This is attributed to the sustained growth observed in the industrial/ heavy equipment construction/ power generation market, global automotive market, and Data Center market as the generative AI boom also triggers new top-line growth opportunities.

At the same time, MOD bottom-line has improved drastically to gross profit margins of 21.8% (+4.9 points YoY/ +6.7 from FY2022 levels) and adj EBITDA margins of 13% (+3.8 points YoY/ 5.3 from FY2022 levels) in FY2024.

This is proof that the management’s 80/20 initiative is working as intended to drive profitable growth, further aided by the price increases and tight operating expenses.

Despite the recent acquisitions to capitalize on the booming demand for generative AI infrastructures/ liquid cooling technologies, with these efforts consequently triggering an intensified debt leveraging, we believe that MOD’s balance sheet remains relatively healthy.

This is because the company has reported a moderating net-debt-to-EBITDA ratio of 1.18x in FY2024, based on the accelerating adj EBITDA generation growth to $314.3M (+48.1% YoY) and net debt of $371.5M (+30% YoY). This is compared to the leverage ratio of 1.34x reported in FY2023 and 2.82x in FY2020.

At the same time, despite the intensified capex from its manufacturing capacity ramp up, MOD continues to report growing Free Cash Flow of $126.9M (+123.4% YoY) and richer margins of 5.2% (+2.8 points YoY) in FY2024, implying its ability to opportunistically tap into the booming demand for generative AI infrastructures.

This is on top of the prospective return of EV demand from 2026 onwards, once price parity to the ICE platform is achieved and the macroeconomic outlook normalizes with borrowing costs moderating to pre-pandemic averages.

MOD Appears To Be Reasonably Valued, Thanks To The Promising Management Guidance & Robust Market Trends

MOD Valuations

Thanks to MOD’s well diversified opportunities in both EVs/ Data Centers, it is unsurprising that the market has temporarily awarded the stock with relatively premium FWD EV/ EBITDA valuations of 15.32x and FWD P/E valuations of 27.47x.

This is up drastically from its 1Y mean of 11.08x/ 19.06x, 3Y pre-pandemic mean of 6.06x/ 10.42x, and the sector median of 9.73x/ 15.88x, respectively.

MOD’s Peer Comparison

When compared to its other thermal management peers, such as Vertiv (VRT) at 27.83x/ 42.86x, Lennox International, Inc. (LII) at 18.30x/ 24.42x and AAON, Inc. (AAON) at 20.97x/ 33.97x, respectively, it is apparent that the market is highly optimistic about their prospects in general.

The Consensus Forward Estimates

The same optimism has also been observed in the raised consensus forward estimates, with MOD expected to generate a higher top/ bottom-line growth at a CAGR of +8.4%/ +19.2% through FY2027. This is compared to the previous estimates of +5.4%/ +12% and the historical growth at +7%/ +22.6% between FY2017 and FY2024, respectively.

When comparing MOD’s growth projections against VRT at +12%/ +30.3%, LII at +5.8%/ +12.1%, and AAON at +9.5%/ +12.2% through 2026, respectively, it appears that the former’s FWD P/E valuations of 27.47x is reasonable as well.

Much of their near-term tailwinds are attributed to the robust market demand for data center infrastructures in general, as similarly reported by Celestica Inc. (CLS). This is especially since Super Micro Computer, Inc. (SMCI), a leading supplier of complete server solutions, has highlighted the “accelerating need for liquid cooling at new data centers.”

This also explains why MOD has strategically (and rather timely) expanded into liquid cooling technologies from the recent acquisition of Napps Technology in July 2023, TMGcore in January 2024, and Scott Springfield Manufacturing in February 2024.

These tailwinds have also contributed to MOD’s robust FY2025 guidance, with revenue growth of +7.5% YoY, adj EBITDA growth of +19% YoY, and adj EPS of $3.70 (+13.8% YoY), underscoring the management’s confidence of delivering profitable growth ahead.

So, Is MOD Stock A Buy, Sell, or Hold?

MOD 5Y Stock Price

As a result, we can understand why MOD has already charted a new peak, while running away from its 50/ 100/ 200 day moving averages and establishing a robust support level at $81s.

For now, the stock is trading notably higher than our estimated fair value estimates of $89.20, based on the FY2024 adj EPS of $3.25 (+66.6% YoY) and the FWD P/E valuations of 27.47x.

However, we believe that there remains an excellent upside potential of +49.4% to our long-term price target of $151.30, based on the consensus FY2026 adj EPS estimates of $5.51.

MOD’s Growing Short Interest/ Insider Selling

As a result of the attractive risk/ reward ratio and promising long-term generative AI trends, we are initiating a Buy rating for Modine Manufacturing Company stock, though with the caveat that interested investors wait for a moderate retracement nearer to its previous support levels of $81s for an improved margin of safety.

This is because we may see moderate volatility in the near term, as short interest continues to grow to 5.13% at the time of writing (+2.44 points QoQ/ +4.61 YoY). An immense growth in insider selling has also been observed, as the management likely cash in some of their long-term stock options.

Some patience may be prudent here.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The analysis is provided exclusively for informational purposes and should not be considered professional investment advice. Before investing, please conduct personal in-depth research and utmost due diligence, as there are many risks associated with the trade, including capital loss.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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