Last week, Modine was named one of the top 10 elite companies in the United States.
Modine Manufacturing (US:MOD), a heating and air conditioning company, is seen as a play on the growth of artificial intelligence and data centers.
Data centers are very energy intensive and generate high levels of heat when in use. This increases demand for Modine cooling products such as immersion chillers and chilled distribution units. The excitement has fueled the stock’s incredible 1,200% rise over the past two years.
It’s not hard to understand the enthusiasm given the company’s forecast that its data center business should increase sales by 60% to 70% for the fiscal year to the end of March, which it will report next week.
“Although currently a small percentage of Modine’s total sales, the data center cooling business is expected to grow significantly following the expansion of the artificial intelligence ecosystem and could account for up to 25% of sales within four years,” said Michael Coyne and Mitchell Brivik, managers of the Voya Small Cap Growth fund, in his first quarter commentary to clients.
But there’s more to Modine’s incredible share price rise and popularity among top fund managers.
Voya Small Cap Growth managers are among 16 elite investors backing Modine, all ranked in the top 3% of the 10,000 global equity managers overseen by Citywire. The high level of support from elite investors, most of whom are small-cap specialists, has resulted in Modine receiving a AAA rating from Elite Companies and also being named a top 10 smart money pick in the United States.
How Citywire Elite Companies Work
Top three elite sponsors
Sources: Citywire/Morningstar, latest asset data.
Beyond AI
Modine’s success in artificial intelligence is part of a larger, long-term strategic transformation for the group, which began as a manufacturer of tractor radiators in 1916.
Data center cooling is one of several growing markets in which the company is focusing its sales efforts. Others include electric vehicle cooling systems and markets that benefit from U.S. government subsidies, such as school heating and cooling systems and heat pumps.
This is part of the 80/20 strategy launched in 2022. The name alludes to the fact that Modine estimates that about 80% of its revenue comes from just 20% of its operations.
In addition to focusing on emerging markets, the plan is to focus on those 20% high-value activities. Essentially, Modine wants to sell more systems, services and software and fewer components.
By directing investments in these areas, Modine believes it will reduce capital requirements while improving profitability and accelerating growth. This is a great recipe for increasing shareholder value.
“Management continues to exit low-margin businesses (automotive) in favor of high-growth markets such as electric vehicles and data centers. We believe these initiatives will generate strong revenue and Ebitda. [earnings before interest tax depreciation and amortisation] growth will continue,” Coyne and Brivik said.
To become better
The results are already impressive and significant further progress is predicted.
Modine forecasts annualized sales growth of 8-10% from 2025 to 2027, Ebitda margin of 13-14% and free cash flow margin of 6-8%. This compares to falling sales, 7.7% margins and negative pre-launch free cash flow of 80/20.
Subsequent acquisitions are used to implement the group’s plan. The company also said it would consider larger strategic deals in the future. With net debt at just £184m at the end of 2023, it has the balance sheet to support this.
The exceptional performance of the data center business contributed to the significant improvement in broker forecasts. Expectations for earnings per share (EPS) for the recently ended fiscal year rose 36% over the 12 months, and forecasts for the current fiscal year are now 29% higher than a year ago.
Given Modine’s rapidly improving business quality and improving growth prospects, a valuation of 27 times forward earnings for the next 12 months doesn’t look out of the ordinary. In two years, the stock will be valued at 23 times projected earnings per share.
However, the valuation, as well as the hopes of Elite’s supporters, depend on Modine’s continued transformation and sustainability of improvements. Before the 80/20 strategy was unveiled two years ago, the stock traded at less than five times earnings. Since the rating change comes down in part to the AI hype, if current data center spending falters, so too could the stock price.
Key Facts – Modine Manufacturing | |||
---|---|---|---|
Market capitalization | $5.52 billion | Price | US$106 |
52 week high/low | US$109/US$20 | Return on invested capital | 17.5% |
Highest price per profit | 27 | First dividend yield | – |
Fastest EPS Growth | 18% | share price for 12 months | 416% |
Source: FactSet EPS = earnings per share. Forecasts for the next 12 months.