America is in the midst of a data center buildout boom. AI hyperscalers are forecasted to collectively spend roughly $700 billion on new data centers in 2026 alone.

While this buildout has led to a massive uptick in energy demand, it’s also creating a massive need for dedicated cooling solutions.

The servers housed in data centers perform trillions of calculations daily, and as a result, generate massive amounts of heat. For example, a large hyperscale data center can produce enough heat to warm thousands of homes through winter months.

The recommended operating temperature range for these facilities is set between 18℃ to 27℃.

Due to the amount of heat generated, cooling systems used in data center operations can consume between 7% to 30% of all the electricity used in these facilities. 

Even if chips become more advanced and energy efficient, cooling systems will continue to play a crucial role in data center operations .

That’s where thermal solutions specialist Modine Manufacturing Company (MOD) comes in.

Modine is a company that specializes in mission-critical thermal solutions management for a wide variety of applications. The solutions it offers include commercial vehicles, HVAC, industrial process cooling, refrigeration cooling, educational and commercial indoor quality, stationary power generation, and others.

The company operates two major segments, Performance Technologies and Climate Solutions. 

Performance Technologies specializes in engineered products and solutions for automotive, agricultural, mining, and stationary power generation applications. Last year, it generated 44% of Modine’s total sales.

Meanwhile, Climate Solutions is composed of several subcategories. Heat transfer solutions specializes in heat exchangers for HVAC applications, commercial refrigeration coolers, and anti-corrosive coatings. 

HVAC Technologies provides HVAC systems for the commercial, industrial, and healthcare sectors. Meanwhile, the data center subcategory specializes in data center cooling solutions. Its end markets include Hyperscale, Colocation, and NeoCloud data centers as well as Edge and Telecom markets.

Last year, Climate Solutions generated 56% of Modine’s total sales, fueled in part by higher demand for the firm’s data center cooling solutions. In fact, the data center subcategory generated 25% of the segment’s total revenue.

Rising demand for data center cooling solutions has enabled Modine to deliver high returns relative to its historical performance.

For years, the company has historically operated as a sub-cost of capital business. Meaning, the returns it generated were below the minimum returns needed to justify its capital expenditures.

In 2025, Modine generated a Uniform return on assets (“ROA”) of 13% thanks to its growing data center business.

With Modine’s climate solutions expertise seeing higher demand, the company has decided to transition from a cyclical automotive thermal components manufacturer into a pure-play climate solutions player.

Earlier this year, Modine announced the spin off of its Performance Technologies business. 

The latter would be combined with Gentherm (THRM), a thermal management and pneumatic comfort technology specialist. The transaction, valued at $1 billion, is expected to close during the fourth quarter of 2026.

As Modine continues to grow its data center business and further specialize in thermal solutions, its returns could continue improving for years to come, warranting upside to its stock.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research

Today’s analysis highlights the same insights we share with our FA Alpha Members. If you want to an get in-depth analysis of market trends and uncover undervalued stocks, become an FA Alpha Member today.