Bernstein initiates coverage on U.S. multi-industrials and electrical equipment: most bullish on data center power/cooling, with clear divergence among industrial leaders

Overview

This is Bernstein’s coverage initiation report on the U.S. multi-industrials and electrical equipment sector. The report divides 11 companies into data center power and cooling, HVAC, industrial automation, multi-industrials, and Otis as a standalone category, arguing that sector structure has changed significantly due to divestitures, spin-offs, M&A, and AI data center capex, weakening the influence of traditional cyclical narratives.

Core views

The core view is that data center construction is reshaping capital flows, with power and cooling equipment suppliers having the clearest structural opportunity, especially Vertiv and nVent; HVAC benefits from data center cooling demand but also faces liquid cooling substitution pressure on chiller intensity; Emerson offers a more attractive long-term value creation framework within industrial automation; and among multi-industrials, Parker-Hannifin’s quality compounding can continue, while 3M is held back by PFAS and uncertainty around its innovation capabilities.

Analysis framework

The report combines sector segmentation, company-by-company ratings, technology path comparisons, expert interviews, and long-term scenario analysis. The technology section focuses on comparing single-phase DTC, two-phase DTC, immersion cooling, etched cold-plate DTC, and silicon-etched DTC, using these to assess the long-term economics of CDUs, cold plates, chillers, and related OEMs.

Methodology notes

• Industry structure analysisCoverage universe grouping framework

  Group U.S. multi-industrial and electrical equipment companies into data center power/cooling, HVAC, automation, multi-industrials, and Otis

  This framework is used to distinguish different demand drivers, valuation debates, and technology substitution paths, avoiding the simplistic treatment of multi-industrial companies as the same cyclical trade.

• Technology path analysisLiquid cooling architecture comparison

  DTC, CDU, cold plate, immersion cooling, silicon-etched cooling

  By comparing the maturity, failure cost, service attachment, and commoditization risk of different cooling methods, the report concludes that CDUs have better long-term equipment economics than cold plates.

• Company fundamentals and valuationRating and target price framework

  Outperform, Market-Perform, Underperform, and company target prices

  Ratings are based on a combined assessment of growth, margins, valuation, execution, technological moat, and risk discounting, and are linked to long-term earnings power around FY28 or 2030.

• Research validationExpert interviews and internal team input

  Input from experts such as data center power cooling managers, HVAC CDU engineering leaders, and regional heads at industrial equipment OEMs

  The report uses expert interviews and input from Bernstein’s U.S. communications infrastructure team to validate views on liquid cooling, CDUs, cold plates, chillers, and supply chain capabilities.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Vertiv (VRT)

  Pure-play exposure to data center power and cooling equipment, rated Outperform, TP $416

  Strengths

  A scaled pure-play name at the forefront of power/cooling technology; added capacity helps absorb backlog and attract new orders; high failure costs favor incumbents; AI model usage demand continues to rise.

  Weaknesses

  The stock has already risen sharply over the past three years, and over the long term could derate toward a 15-20x multiple more typical of service-oriented businesses.

  Comparison

  The report believes it has rare scaled pure-play exposure in data center power and cooling equipment.

  Risks

  Rapid gains in model efficiency, a significant slowdown in AI capex, custom chips changing equipment demand, and long-term valuation compression.

• nVent (NVT)

  Exposure to data center system protection and CDU-related opportunities, rated Outperform, TP $218

  Strengths

  Its CDU products are competitive and it is positioning itself as a liquid cooling expert; OCP and Deschutes-compatible CDUs strengthen hyperscaler customer relationships; investments in capacity and talent support growth; system protection margins have operating leverage.

  Weaknesses

  Its relationship with NVIDIA is not as strong as Vertiv, Schneider, and Eaton; the market still prices it on moderate growth and margin expectations.

  Comparison

  The report believes nVent leads most competitors after NVIDIA’s core cooperation tier.

  Risks

  A slowdown in AI capex, intensifying CDU competition, and capacity investments pressuring margins for longer than expected.

• Trane Technologies (TT)

  Top HVAC pick, rated Outperform, TP $550

  Strengths

  Strong operating capability, with North American revenue and margin outlook above consensus; fast and broad liquid cooling innovation cycle; one of the few pure HVAC companies consistently mentioned by NVIDIA.

  Weaknesses

  Chiller demand intensity could decline due to the shift toward liquid cooling; valuation carries a premium versus peers.

  Comparison

  The report ranks Trane as the top pick in the HVAC sector.

  Risks

  Price-fixing class action litigation, incremental liquid cooling equipment revenue failing to offset weaker chiller intensity, and premium valuation compression.

• Johnson Controls International (JCI)

  HVAC and building systems, rated Outperform, TP $176

  Strengths

  Early lean transformation results are strong, and the organization appears aligned on the pace of change; data center chiller demand provides a near-term tailwind; a potential sale or spin-off of the F&S business could unlock capital.

  Weaknesses

  There are still concerns about its CDU products; the lean transformation must expand from lighthouse projects to the full organization.

  Comparison

  Relative to Carrier, the report prefers JCI’s combination of near-term chiller exposure and lean transformation.

  Risks

  Execution risk in the lean transformation, cybersecurity and Tyco-era PFAS legal exposure, and insufficient CDU capability.

• Carrier Global (CARR)

  HVAC, rated Market-Perform, TP $75

  Strengths

  Data center demand can offset U.S. residential weakness in the short term; rising R-410A service costs could drive replacement demand; some Viessmann synergies have already been realized.

  Weaknesses

  U.S. residential demand is weak, the Viessmann acquisition was expensive, and the outlook for European heat pumps is uncertain; the shift toward liquid cooling will reduce chiller revenue intensity.

  Comparison

  Valuation is viewed as broadly fair, with less structural clarity than Trane and JCI.

  Risks

  Further downturn in the housing cycle, difficulty competing long term with focused players such as Vertiv, Motivair, and Boyd, and escalating pricing litigation risk.

• Emerson Electric (EMR)

  Industrial automation, rated Outperform, TP $175

  Strengths

  Its long-term value creation framework is likely to be realized; LNG, power, pharmaceuticals, semiconductors, A&D, EV, and software ACV growth support about 6% through-cycle growth; AI poses relatively low disruption risk to its software portfolio.

  Weaknesses

  The market is still debating the credibility of its long-term algorithm; refining-related demand is soft.

  Comparison

  Among the automation names under coverage, Emerson has a clearer upside framework than Honeywell and Rockwell.

  Risks

  A weaker process automation cycle, delayed timing for an S&P sale/spin, and failure to reach the FY28 margin target.

• Honeywell (HON)

  RemainCo automation business, rated Market-Perform, TP $233

  Strengths

  The Aerospace spin-off helps sharpen focus on the automation core; Building Automation is a key growth platform for RemainCo; early customer feedback on Forge analytics value is positive.

  Weaknesses

  There is limited technology and customer overlap across RemainCo business units; PA&T is more exposed to geopolitics and low O&G growth; IA growth expectations are relatively muted.

  Comparison

  The report views Honeywell as still a “show me” story that needs more operating evidence.

  Risks

  Insufficient synergies after the spin-off, geopolitical risk, inadequate proof of Forge commercialization, and margin challenges in industrial automation.

• Rockwell Automation (ROK)

  Industrial automation, rated Market-Perform, TP $501

  Strengths

  A capex cycle inflection, reindustrialization, and automation equipment spending support demand; software and services ARR have growth potential; an upcycle could drive mid-50% incremental margins.

  Weaknesses

  The market has already priced in much of the potential upside; structural margin improvement in intelligent devices still needs to be observed.

  Comparison

  The report acknowledges the company’s quality but sees limited near-term upside.

  Risks

  Failure of software or service demand to materialize, weaker customer capex, and insufficient progress in margin improvement initiatives.

• Parker-Hannifin (PH)

  Multi-industrials, rated Outperform, TP $1,026

  Strengths

  Strong history of operational excellence, with rising exposure to high-margin and high-growth markets; A&D and filtration businesses enhance revenue stickiness; the Filtration Group and Circor deals are strategically complementary.

  Weaknesses

  At the acquisition prices paid for FG and Circor, the ROIC-WACC spread is only about 1%, leaving little room for error.

  Comparison

  The report believes its quality compounding and M&A integration track record support a premium valuation.

  Risks

  M&A integration underperforming expectations, a higher interest-rate environment depressing returns, and magnified execution errors.

• 3M (MMM)

  Multi-industrials, rated Underperform, TP $131

  Strengths

  Management has made some progress in transformation and value creation, and SG&A reductions may continue.

  Weaknesses

  Rebuilding the R&D innovation engine is difficult, multiple end markets face headwinds, and PFAS remains a major long-term overhang.

  Comparison

  DCF fair value is $131, and the report sees limited upside.

  Risks

  Uncertainty around PFAS personal injury, natural resource damage, and insurance recovery cases could extend into the 2030s; the market may be overestimating the speed of the R&D recovery.

• Otis Worldwide (OTIS)

  Elevators and services, rated Outperform, TP $97

  Strengths

  The growth potential of the modernization business is underestimated; new products and cross-selling already show positive signs; the China business may return to revenue growth by FY27; digital initiatives such as Otis ONE can improve retention.

  Weaknesses

  Performance over the past year fell short of expectations, pressuring valuation; installed base growth has slowed versus history.

  Comparison

  The report believes the market is overly punitive in pricing OTIS as being in the “penalty box.”

  Risks

  Weaker-than-expected recovery in China construction, competition from independent service providers, and slow conversion of the service-first strategy.

Key data

• Number of companies covered11 companiesCovers categories including data center equipment, HVAC, automation, multi-industrials, and Otis.
• Data center power/cooling ratingsVRT Outperform TP $416; NVT Outperform TP $218Both companies’ target prices imply about 30%-40% upside.
• HVAC ratingsTT Outperform TP $550; JCI Outperform TP $176; CARR Market-Perform TP $75Trane is the top HVAC pick, JCI benefits from lean transformation and chiller demand, while Carrier faces more valuation debate.
• Automation ratingsEMR Outperform TP $175; HON Market-Perform TP $233; ROK Market-Perform TP $501Emerson’s long-term value creation framework is more highly regarded, while Honeywell and Rockwell need more validation for upside.
• Multi-industrials and other ratingsPH Outperform TP $1,026; MMM Underperform TP $131; OTIS Outperform TP $97Parker-Hannifin’s quality compounding is favored, 3M is weighed down by PFAS and uncertainty around rebuilding R&D, and Otis is supported by modernization and service strategy.
• Vertiv forecast differenceFY28 revenue about 15% above sell-side consensusPrimarily driven by top-line differences, while margin assumptions are broadly in line with the market.
• nVent forecast differenceFY28 EPS about 15% above consensusMainly driven by CDU technology, the data center system protection business, and investments in capacity and talent.
• JCI lean transformation metrics2x customer-facing sales time, 99% reduction in proposal time, 4x output increase with no additional CapExDerived from Gemba Day-related project results, though still needing to scale across the organization.
• Emerson long-term targets4%-7% through-cycle growth target, with the report leaning closer to 6%; FY28 EBITA target of 30%Supported by growth from LNG, power, pharmaceuticals, semiconductors, A&D, EV, and software.
• Long-term view on cold platesHigh commoditization risk around 2030, with long-tail displacement risk from silicon-etched coolingSupported in the short term by supply scarcity and innovation premium, but design standardization and the foundry ecosystem could compress value.
• Long-term view on CDUsBetter long-term outlook than cold platesCDUs remain critical equipment across multiple liquid cooling architectures, with high failure costs, strong service attachment, and greater manufacturing complexity.

Impact & implications

The investment implication is that excess return opportunities in U.S. multi-industrials are shifting from traditional cyclical recovery toward AI data center infrastructure, liquid cooling technology migration, service attachment, and company execution. The likely winners in the data center equipment chain are OEMs with engineering capabilities, capacity, customer relationships, and service capabilities, rather than single-component suppliers that are easy to standardize and outsource.

Risks

• A significant slowdown or pause in AI capital spending could weaken demand for data center equipment.
• AI model efficiency improves too quickly, reducing the power and cooling needed for the same computing output.
• Custom chips or new architectures change the demand mix for data center power/cooling equipment.
• Cold plates become commoditized around 2030 as design standardization, two-phase DTC maturity, and the foundry ecosystem develop.
• If silicon-etched microchannel cooling is commercialized, it could reduce or eliminate demand for cold plates.
• The shift to liquid cooling reduces chiller intensity, creating medium- to long-term pressure on traditional HVAC revenue.
• U.S. residential HVAC demand is dragged down by high interest rates and consumer pressure.
• Uncertainty around 3M’s PFAS-related litigation and payouts could persist into the 2030s.
• There is execution risk in JCI’s lean transformation and PH’s M&A integration.
• High-quality companies already trading at elevated valuations may face multiple compression.

What to watch

• Whether AI data center capex and orders continue to support VRT, NVT, TT, and JCI.
• Expansion in CDU supply, progress in OCP/Project Deschutes standardization, and whether OEMs can retain manufacturing and service premiums.
• Whether cold plates shift from a shortage product to a standardized outsourced product, and how quickly two-phase DTC matures.
• Vertiv’s backlog conversion and the release of new capacity.
• Evidence of nVent’s CDU volume production, hyperscaler customer relationships, and system protection margins improving toward the mid-20s.
• Whether Trane’s liquid cooling equipment revenue can offset declining chiller intensity.
• Whether JCI’s lean transformation can expand from lighthouse projects to the whole company, and progress on potential F&S disposal.
• Carrier’s U.S. residential demand, Viessmann synergies, and trends in the European heat pump market.
• Whether Emerson achieves its FY28 30% EBITA target and progresses on a potential S&P sale or spin-off.
• RemainCo growth quality and Forge analytics metric disclosure after Honeywell Aerospace is spun off.
• Whether deferred demand for Rockwell’s software and services is released.
• Progress in 3M’s PFAS cases and R&D reboot.
• Otis’s China service-first strategy, modernization orders, and digital retention metrics.