European Capital Goods Report Interpretation

Overview

This conference note summarizes Morgan Stanley's discussions with more than 50 corporates and roughly 400 investors across European capital goods. Its central conclusion is that data-center-related demand remains the strongest driver, while pricing, productivity and better contract protections support a constructive margin outlook through 2027.

Core views

Morgan Stanley's principal conference takeaway was that data-center demand continues to exceed expectations. Electrification companies reported no change in customer ordering behavior after a strong 1H26 and pushed back on double-ordering concerns. Rexel said data-center demand was ahead of expectations in 2H26, which Morgan Stanley views as a positive read-across for white-space data-center-exposed names such as Legrand, where organic growth could accelerate. Schneider cited high prepayment levels, defined volume and architecture roadmaps, and three-year planning horizons among its top 20 data-center customers. Companies reported no negative impact so far from data-center construction delays. On the shift to 800V DC, presenters estimated 10-20% or about 25% of 2030 installations, but Schneider and ABB viewed their dollar-per-megawatt opportunity as broadly stable through the transition. US activity was characterized as broadly resilient despite softer August ISM new orders. Atlas Copco pointed to demand from gas infrastructure, solar-panel investment, gas turbines and US auto. Siemens described the US as its strongest Digital Industries region, with data-center-related manufacturing demand supporting machine tools and the PLCs attached to them. This suggests that data-center spending is affecting capital-goods demand both directly and indirectly through the manufacturing chain. Morgan Stanley argues that investors should not assume sector margins peak in 2026. Capital-goods companies continue to gain traction on price increases, while productivity programs are expected to provide further benefits in 2027. The firm sees Electricals as more likely to deliver positive margin surprises than disappointments: Schneider is implementing additional pricing, while ABB North America, Schneider productivity measures, and Rexel's AI and European restructuring provide company-specific drivers. Atlas Copco was relatively more focused on growth than margin expansion in Compressors, reflecting the business's ROCE, but identified market-share opportunities in Compressors and Vacuum through innovation and capacity ramp-up. Raw-material and energy inflation was framed chiefly as an indirect risk rather than an immediate earnings threat. Backlog-heavy businesses including Kion IAS, NKT and Siemens Energy cited improved inflation-escalation clauses versus the 2021-22 inflation episode. In Electricals, price increases implemented in 1H26 are expected to catch up with cost inflation in 2H26, improving price-cost and gross-margin dynamics; Kion also expects similar support for ITS margins. Morgan Stanley nevertheless flags Signify as more exposed because its profitability is back-end loaded and its construction and online-retail end markets remain challenging. For Europe, the report does not identify evidence of a broad industrial-cycle recovery. Instead, more favorable demand is concentrated in HVAC and heat pumps, grid investment, solar, EV charging and physical AI. Rexel reported continued electrification growth into 3Q26 as Europe seeks lower energy consumption amid higher gas and oil prices, while Alfa Laval said heat-pump OEM orders were progressing but remained below peak levels. Siemens highlighted adoption of AI agents for PLC coding, and Kion pointed to its Nvidia/Siemens partnership; both stressed domain knowledge and data access as barriers to entry. At the company level, Morgan Stanley found Rexel and Atlas Copco relatively confident. Rexel cited US data-center and European electrification support and retained confidence in achieving its above-7% target during 2027-29. Schneider emphasized pricing and productivity, strong data-center visibility, and interest in M&A linking physical and digital capabilities. Siemens Energy was confident on its 1H27 order pipeline and gas-turbine pricing, with a further North American grid-demand leg tied to data centers and Middle Eastern demand. Morgan Stanley maintained its view that Siemens Energy's share price should rise as its 2028 11x EV/EBIT multiple rolls onto higher 2029 EBIT, for which it forecasts 23% growth.

Analysis framework

Morgan Stanley synthesizes management comments from conference presentations and fireside chats across capital-goods subsectors. It tests demand conditions by end market and region, assesses order visibility and customer behavior in data centers, and evaluates margin prospects through pricing, productivity, contract inflation protection and company-specific operating drivers.

Methodology notes

• Industry AnalysisSupply-demand framework

  Demand and order-readiness assessment across data centers, US capex markets and European thematic markets.

  The report uses management commentary on orders, customer planning horizons, backlog and end-market activity to judge where capital-goods demand is strengthening or remaining subdued.

• Industry AnalysisVolume-price decomposition

  Price-cost and productivity analysis for sector margin prospects.

  Morgan Stanley separates pricing actions, cost inflation, productivity programs and contractual inflation clauses to explain why margins could remain resilient into 2027.

• Valuation methodsEV/EBITDA valuation

  Forward enterprise-value-to-EBIT valuation for Siemens Energy.

  The report refers to an 11x 2028 EV/EBIT multiple rolling forward onto higher 2029 EBIT; this is a forward earnings-multiple approach, though the vocabulary label uses EV/EBITDA.

Asset mapping & comparison

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

• Rexel

  Beneficiary of US data-center demand and European electrification activity.

  Strengths

  Management cited strong growth support from US data centers and HVAC-related electrification, with confidence in its above-7% target for 2027-29.

  Comparison

  Stood out as relatively confident in its conference presentation.

• Atlas Copco

  Beneficiary of broad US capex demand and potential Vacuum market-share gains.

  Strengths

  Cited broad compressor demand, US strength, solid demand in China and Asia, and capacity advantages in Vacuum.

  Weaknesses

  Margin focus in Compressors is more conservative because management prioritizes growth given the business's ROCE.

  Comparison

  Stood out as relatively confident among conference participants.

• Schneider Electric

  Data-center and Electrification beneficiary.

  Strengths

  High data-center order visibility, high prepayment levels, three-year customer planning, pricing execution and productivity focus.

  Comparison

  Alongside ABB, it sees relatively stable dollar-per-megawatt opportunity through the 800V DC transition.

• Siemens Energy

  Beneficiary of gas-turbine demand and data-center-linked grid build-out.

  Strengths

  Confident 1H27 order pipeline, gas-turbine pricing ahead of orders, and further grid-demand potential in North America and the Middle East.

  Comparison

  Morgan Stanley remains Overweight and expects the valuation multiple to roll onto higher 2029 EBIT.

  Risks

  Raw-material and energy-price inflation remains an indirect risk, although contract protections have improved.

• Signify

  Capital-goods company facing more challenging end-market conditions.

  Weaknesses

  Profitability is back-end loaded, while construction and online-retail demand remain challenging.

  Comparison

  More exposed than the favored Electricals names to weaker end-market conditions.

  Risks

  Margin-delivery risk if challenging construction and online-retail conditions persist.

Key data

• Conference participationOver 50 corporates and c.400 investorsMorgan Stanley's annual Industrials CEOs Unplugged Conference
• Data-center demandAhead of expectations in 2H26Based on Rexel commentary; companies also reported strong visibility into 2027
• 800V DC share of 2030 installations10-20% and ~25%Range of company views heard at the conference
• Rexel target>7%Management expects achievement during 2027-29
• Halma photonics organic revenue growth+30%Guidance reiterated for FY26/27
• Siemens Energy valuation and earnings growth11x 2028 EV/EBIT; +23% 2029 EBIT growthMorgan Stanley's cited basis for its positive Siemens Energy share-price view

Impact & implications

The report argues that data-center investment is extending demand across electrical equipment, grid infrastructure and related industrial production. It also sees pricing, productivity and stronger contract terms reducing the risk of a near-term margin peak, while leaving broad European cyclical recovery less convincing than demand in selected electrification and AI-linked themes.

Risks

• Rising raw-material, gas and electricity prices could create indirect pressure across the sector.
• Signify faces particular execution risk because profitability is back-end loaded and construction and online-retail demand remains challenging.
• The report finds limited evidence of a broad European industrial recovery outside thematic growth areas.

What to watch

• Whether data-center sales growth continues to exceed expectations in 2H26 and whether customer ordering patterns remain disciplined.
• Evidence of data-center build-out delays or changes in the three-year planning visibility reported by major customers.
• Electricals price-cost progression and productivity delivery in 2H26 and 2027.
• Demand trends in European HVAC, heat pumps, grid investment, solar and EV charging.
• Siemens Energy's 1H27 order pipeline, gas-turbine pricing and potential further share-buyback announcement.