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Electronics are Hot, Hot, Hot

Partially due to regulation, and partially to a frenzy around AI, both the EV and data center markets are on fire right now. And though there may seem to be little correlation between the two markets, they share something essential. That is an essential need to cool both large data centers that stretch on for acres, and an increasing number of electronics that must exist in the small confines of an EV. Modine (MOD), with its extensive experience in thermal management, has an answer for both.

Sitting by your computer everyday at work or home, you get to experience first hand one of the basic, yet constantly present, challenges faced by the electronics industry…whether its EVs or large data centers (which are growing like gangbusters because of artificial intelligence demand)...and that is the fact that all of those electronics get HOT! Especially when they are packed into a tight space, such as an automobile.  

That heat impacts performance (as in your EV going 200 miles without cooling vs. 300 miles with sufficient cooling), longevity, and safety. While they are striving for cooler batteries and electronic components, the actual “thermal management”, or cooling system to you and me, is a problem these manufacturers are more than happy to outsource to experienced companies like Modine (MOD)

Modine has been in the thermal management business for over a hundred years. The company has 37 manufacturing facilities in 14 countries, and is based in Racine, WI. 

Modine divides its business into two segments: Climate Solutions, which sells into the data center, HVAC and refrigeration and heat exchange markets, and Performance Technologies which sells into the EV, trucking, and industrial stationary power markets. 56% of sales comes from Performance Solutions, and 44% from Climate Solutions. 

MOD sells both components and complete cooling systems, and is in the process of focusing more on higher margin systems than individual components. Many of the areas in which it operates are growing rapidly. 

Battery and electronics cooling for the EV market is growing at a 35-40% CAGR (compound annual growth rate), data centers are growing at a 20-30% CAGR, and the heat pump market, especially driven by regulatory changes and subsidies in Europe, is growing at a whopping 40-50% CAGR (all CAGRs are based on a three year time period).

In its latest quarterly earnings the company increased net sales 15% YoY to $622.4 million, and increased operating income 160% YoY to $66.5 million. For fiscal 2024 Modine expects net sales to increase 6-11% and for EBITDA to increase in the 32-39% range. 

Modine trades at a PE of only 11.6, at .53 times sales, and at just over 2 times book value. Commenting on the recent quarter Modine President and CEO, Neil D. Brinker, stated, “This was an incredible quarter for Modine, with record revenue and significant margin expansion, as both segments exceeded expectations by driving strong growth and operational improvements.”

The company is in the middle of a realignment, using an 80/20 strategy of focusing on high margin businesses, and shedding some underperforming units. Modine recently rolled out its new EV cooling system solution in Europe, where regulatory demands ensure a rapidly growing EV market. 

Modine has an overall A rating in our POWR Ratings, with over 90% scores in the Growth, Quality, and Sentiment components. The company scores 95.54% better than all the companies in our database. 

The stock has traded exceptionally well in 2023, basically doubling. But, it has pulled back recently from over $50 to just over $40, and is trading at around the same price it reached when it announced its blowout quarterly numbers in early August. 

Modine is operating in fast growing sectors, with a regulatory tailwind, and provides an essential product necessary for the safe and efficient operation of the systems with which it interacts. And, on top of that, the company is trading at a great valuation. 

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MOD shares were trading at $41.46 per share on Tuesday morning, up $1.06 (+2.62%). Year-to-date, MOD has gained 108.76%, versus a 11.76% rise in the benchmark S&P 500 index during the same period.

About the Author: Steven Adams

After earning a law degree cum laude with a focus on securities law, Steven worked as a Nasdaq market maker for a large broker dealer, and then as a trader for an arbitrage focused proprietary hedge fund. He subsequently worked as a consultant for a Fortune 500 consulting firm serving both government and commercial clients, including the NYSE, Prudential, FDIC, and NASA.


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