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Data center and grid investment drive growth in the industrial sector; near-term expansion costs do not alter medium-term strength
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Data center and grid investment drive growth in the industrial sector; near-term expansion costs do not alter medium-term strength
Deutsche Bank’s conference feedback on 16 industrial companies was broadly positive, with orders and backlog remaining strong. Data centers, electrification, and utility investment are the core growth engines, while capacity buildout and weakness in some end markets create temporary margin pressure.
- Data center demand was a recurring theme across companies such as CARR, NVT, VRT, WTS, RRX, and VLTO, with liquid cooling, thermal management, and power distribution equipment becoming key structural growth areas.
- ETN, GEV, HUBB, and CTOS reflect strong demand from electrification, grid upgrades, and transmission investment, with orders, inquiries, or backlog still offering high visibility.
- Many companies expect new capacity and unfavorable business mix to pressure margins in the second half of 2026, but capacity release, volume leverage, and productivity improvements are expected to support earnings in 2027.
- Residential HVAC, pools, commercial real estate, and some European end markets remain weak, and the pace of recovery is uncertain.
- Capital allocation remains generally disciplined, with companies preferring organic capacity expansion, deleveraging, and share repurchases over large acquisitions at elevated valuations.
Report interpretation
Overview
The report summarizes Deutsche Bank’s Global Industrials and Materials Conference held in Chicago on August 11–12, 2026. The research team attended six fireside chats and one-on-one meetings with 10 companies, distilling three key takeaways for each company. Overall, demand for data centers, power infrastructure, and industrial automation is strong, with orders and backlog providing good revenue visibility; at the same time, capacity expansion spending, supply chain costs, tariffs, and weakness in residential-related markets create near-term pressure.
Core views
Growth in the industrial sector is expanding from a single end market into multiple themes including data centers, the grid, automation, and water. Demand for long-cycle projects remains active, and some short-cycle businesses are also showing signs of recovery. Companies are generally capturing demand through capacity expansion, supply chain improvements, and higher pricing, but expansion and changes in business mix will temporarily dilute margins. The key for 2027 is whether backlog can be smoothly converted into revenue and whether new capacity, productivity, and pricing actions can translate into earnings growth.
Analysis framework
The report uses management fireside chats and one-on-one meetings as its primary information sources, comparing orders, inquiries, backlog, revenue conversion, capacity, pricing, margins, and capital allocation by company, while assessing operating trends from the second half of 2026 to 2027 in light of short-cycle and long-cycle businesses, regional differences, and end-market exposure.
Methodology notes
Assess future revenue visibility through orders, book-to-bill ratios, backlog size, and delivery lead times.
The report focuses on whether order growth can be sustained, whether backlog is expanding, and whether faster deliveries are causing backlog to decline, in order to distinguish weaker demand from normal revenue conversion.
Compare the timing of different industrial businesses’ responses to economic cycles and project construction cycles.
Short-cycle automation and components typically reflect demand changes earlier, while long-cycle businesses such as power, energy, and large projects improve later, helping assess the breadth and sustainability of recovery.
Evaluate the combined impact of pricing, raw materials, tariffs, business mix, capacity utilization, and productivity on margins.
The report distinguishes near-term pressure caused by capacity expansion and data center project mix from medium-term margin improvement driven by volume leverage, restructuring, and productivity gains.
Assess capital-use priorities based on returns, asset prices, and financial leverage.
Many companies prioritize expanding capacity related to data centers or utilities, reducing leverage, and repurchasing shares, while maintaining discipline toward large acquisitions at elevated valuations.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- Ametek (AME)Benefits from a broad recovery in industrial demand, energy and power investment, and M&A integration.
- Strengths
- Second-quarter organic orders grew 25%, short-cycle and long-cycle businesses improved simultaneously, and backlog was slightly above USD 4 billion.
- Weaknesses
- Customized products may lengthen project cycles, and M&A integration still requires continued execution.
- Comparison
- EMG improved first, while EIG typically lags by about two to three quarters and is now starting to follow upward.
- Risks
- Synergies from Indicor and FARO fall short of expectations, industrial recovery slows, and supply chain costs rise.
- Badger Meter (BMI)Benefits from water digitization, cellular AMI migration, and market share gains.
- Strengths
- Cellular AMI has a first-mover advantage, and 2027 water budgets and bidding activity remain healthy.
- Weaknesses
- Project activity in 2026 is in a temporary lull, and organic sales are expected to be only roughly flat.
- Comparison
- Compared with some competitors shifting to cellular solutions, the company has more mature cellular technology and a portfolio of mechanical and static water meters.
- Risks
- Copper, electronics, tariffs, and turnkey project mix may pressure gross margin.
- Carrier (CARR)Benefits from data center cooling demand and stabilization in residential HVAC markets in the Americas and Europe.
- Strengths
- 2026 data center revenue is expected to be approximately USD 2 billion, with backlog of approximately USD 3.0 billion to USD 3.5 billion.
- Weaknesses
- Data center business mix and new capacity investment will dilute margins in the near term.
- Comparison
- Compared with the traditional residential HVAC business, the data center business is growing faster but has lower margins in the near term.
- Risks
- Capacity expansion execution, declining demand for traditional boilers in Europe, and a residential market recovery below expectations.
- Custom Truck One Source (CTOS)Benefits from high-voltage transmission projects and utility equipment rental demand.
- Strengths
- Inquiries and orders continue to grow at a mid-teens rate, and the high-voltage project pipeline is strong over the next approximately 12 months.
- Weaknesses
- Fleet expansion is being limited to control leverage, which may affect revenue capture during demand peaks.
- Comparison
- A strong utility business can partially offset softness in non-utility product lines.
- Risks
- Pace of deleveraging, fleet aging, and delays in large transmission projects.
- Eaton (ETN)Benefits from electrification, data centers, and power infrastructure investment.
- Strengths
- The book-to-bill ratio is expected to remain above 1x, margin guidance is strong, and the long-term financial framework may be raised.
- Weaknesses
- Delivery lead times have shortened after capacity expansion, growth expectations are high, and execution requirements have increased.
- Comparison
- Among participating companies, it combines high growth, strong backlog, and a relatively clear path to margin improvement.
- Risks
- Large projects are delayed, capacity ramp-up is not smooth, and the long-term growth framework is not raised as expected.
- GE Vernova (GEV)Benefits from gas-fired power generation, electrification, and long-term growth in power demand.
- Strengths
- Gas turbine slots are booked through 2029 to 2031, pricing power is strong, and the service moat is solid.
- Weaknesses
- Very long lead times increase the complexity of project execution and supply chain management.
- Comparison
- Compared with general equipment companies, its non-refundable down payments and service agreements with high technical barriers provide higher backlog quality.
- Risks
- Large project delays, supply chain bottlenecks, cost inflation, and changes in the long-term power investment cycle.
- Honeywell (HON)Benefits from improving short-cycle and long-cycle orders and margin expansion.
- Strengths
- Management expects mid-teens adjusted EPS growth in 2027, and order activity remains strong.
- Weaknesses
- The 2027 earnings outlook may be below some buy-side expectations of approximately USD 10.
- Comparison
- The company provided a cautious 2027 outlook relatively early, offering higher certainty but potentially limiting upside surprise.
- Risks
- Organic growth falls short of expectations, execution risks around separation or business adjustments, and slower margin improvement.
- Ingersoll Rand (IR)Benefits from improved long-cycle order conversion, price increases, and productivity improvements.
- Strengths
- Organic order growth accelerated in July, and second-half 2026 margins are set up to improve versus the first half.
- Weaknesses
- Management is not yet willing to extrapolate one month of order strength into sustained double-digit growth.
- Comparison
- Conversion of long-cycle inquiries into orders is improving, while short- and medium-cycle demand remains at mid-single-digit growth.
- Risks
- Pricing pressure in China, tariffs, softer volumes, and unsustainable order improvement.
- Hubbell (HUBB)Benefits from utility orders and backlog growth.
- Strengths
- Confidence in second-half demand is high, pricing execution is steady, and free cash flow supports rapid deleveraging.
- Weaknesses
- Margins are relatively sensitive to the relationship between price and cost.
- Comparison
- The company is more likely to pursue bolt-on transactions in the near term rather than another large acquisition of approximately USD 3 billion.
- Risks
- Rising raw material costs, pricing failure, M&A integration, and delays in utility projects.
- Lennox International (LII)Supported by commercial HVAC business growth and emergency replacement share gains.
- Strengths
- Commercial volume growth is significantly outperforming the market, and factory productivity and digital service platforms are expected to improve margins.
- Weaknesses
- Residential demand remains weak, and the company has proactively exited low-margin residential builder contracts.
- Comparison
- Commercial business performance is stronger than peers, while the owned distribution model leaves the residential business relatively pressured during the restocking phase.
- Risks
- Delayed residential market recovery, continued preference for repair over replacement, and slower-than-expected buildout of the parts network.
- nVent Electric (NVT)Benefits from data center liquid cooling and the long-term electric utility investment cycle.
- Strengths
- The order pipeline is strong, there is significant room for liquid cooling penetration to rise, leverage is approximately 1.1x, and M&A capacity remains available.
- Weaknesses
- Existing capacity is constrained, and capacity expansion investment in the second half of 2026 will create margin pressure.
- Comparison
- The company directly interfaces with chipmakers’ multi-generation product roadmaps and is well positioned in liquid cooling system iterations.
- Risks
- New factory ramp-up, changes in the liquid cooling technology path, customer concentration, and M&A execution.
- Otis Worldwide (OTIS)Repair pricing, modernization demand, and connected equipment support service business recovery.
- Strengths
- Repair business pricing elasticity is low, and SG&A savings are expected to drive a service margin recovery in the second half.
- Weaknesses
- Customer retention and service quality remediation may take about one year, and long-term margin expansion may be limited.
- Comparison
- In the near term, the company is more focused on repair micro-pricing rather than maintenance price increases that could hurt retention.
- Risks
- Customer attrition, slow recovery in service quality, competitive pressure, and unfavorable modernization business mix.
- Regal Rexnord (RRX)Benefits from ePOD commercialization, AMC demand, and data center-related commercial HVAC growth.
- Strengths
- Customer interest in ePOD is strong, AMC orders and backlog are healthy, and commercial HVAC grew more than 30% in the second quarter.
- Weaknesses
- Residential HVAC and pool end markets remain affected by destocking and weak consumer demand.
- Comparison
- There is a clear divergence between data center-related businesses and businesses exposed to consumers.
- Risks
- ePOD supply chain, ultimate margins, and commercialization progress fall short of expectations.
- Veralto (VLTO)Benefits from the water quality business, data center water treatment demand, and improving industrial activity.
- Strengths
- Management reiterated acceleration in growth and margins in the second half of 2026, and ChemTreat achieved high-single-digit to double-digit organic growth.
- Weaknesses
- PQI growth is skewed toward the fourth quarter, and improvement in automotive and electronics end markets is not yet broad-based.
- Comparison
- Data center and industrial recovery are first reflected in ChemTreat and then transmitted to Hach and PQI.
- Risks
- Insufficient delivery of second-half growth, uncertainty in M&A pace, and reduced scale effects from potential business separations.
- Vertiv (VRT)Directly benefits from global data center construction and demand for thermal management and power infrastructure.
- Strengths
- Project conversion in Europe and Asia is accelerating, the growth ceiling in the Americas remains high, and management has not observed market share loss.
- Weaknesses
- Supply chain coordination issues previously caused delivery congestion, and new capacity in Malaysia will pressure margins in the near term.
- Comparison
- The company is building flexible capacity ahead of time in an effort to outperform the overall market and further gain share.
- Risks
- Overly rapid capacity expansion, increased inventory buffers, regional project delays, and volatility in delivery timing.
- Watts Water Technologies (WTS)Benefits from data center thermal energy storage and data center construction in Europe.
- Strengths
- CoolVault products, engineering capabilities, and brand reliability create differentiated competitive advantages.
- Weaknesses
- Data center projects increase revenue volatility, while core residential and commercial end markets remain weak.
- Comparison
- The data center business is growing significantly faster than the traditional core business, and European opportunities may not yet be fully recognized.
- Risks
- Volatility in large projects, delayed recovery in Europe, and no improvement in the interest rate environment.
Key data
- Number of participating companies16 companiesIncluding six fireside chats and 10 one-on-one meetings.
- CARR data center revenueApproximately USD 2 billion in 2026Expected annualized revenue exit rate of approximately USD 2.5 billion in 2026, with related backlog of approximately USD 3.0 billion to USD 3.5 billion.
- CARR incremental capital expenditureApproximately USD 100 millionPrimarily for expanding CDU and data center HVAC capacity.
- ETN electrical business book-to-bill ratioExpected to remain above 1x in the second half of 2026Implies backlog is expected to continue growing year over year, with delivery lead times reduced to approximately 12 to 18 months.
- ETN Electrical Americas marginApproximately 30% in the third quarter of 2026 and approximately 32% to 32.5% in the fourth quarterThe company continues to target a medium-term segment margin of approximately 32%.
- GEV gas turbine delivery slotsBooked through late 2029 to 2030, with some extending to 2031Long lead times have not yet significantly suppressed customer demand or negotiation activity.
- GEV gas turbine down payment15% to 20%Non-refundable down payments and long-term service agreements improve the cycle resilience of backlog.
- AME second-quarter organic order growth25%Growth covered both short-cycle and long-cycle businesses, indicating a relatively broad demand recovery.
- AME backlogSlightly above USD 4 billionMost is expected to be delivered within approximately 12 months, with overall orders scheduled out to approximately 18 months.
- NVT liquid cooling penetration viewRising from the current approximately 10% to 15% to 30% by 2030Shorter chip lifecycles may drive continuous cooling system upgrades alongside generational upgrades.
- NVT organic revenue CAGR target10% to 13% through 2028Management indicated that current progress is ahead of the original plan.
- OTIS service margin targetApproximately 24% to the mid-24% range in the fourth quarter of 2026Micro-pricing in repair, SG&A savings, and business mix improvement are the main drivers.
- BMI 2026 organic sales expectationRoughly flatThird-quarter revenue is expected to increase sequentially, but copper, electronics, tariffs, and project mix will pressure gross margin in the second half.
Impact & implications
For investors, data center and grid capital expenditure remain the clearest structural opportunities in the industrial sector. Companies with capabilities in power distribution, liquid cooling, thermal management, gas-fired power generation, and utility equipment are more likely to achieve order and share growth. Near-term valuation and earnings assessments should not look only at revenue growth, but also consider expansion costs, project mix, and delivery timing. If capacity buildout proceeds as planned in the second half of 2026, 2027 could see a simultaneous release of revenue growth, volume leverage, and productivity improvement; conversely, delivery delays, cost overruns, or weakening end demand would amplify earnings volatility.
Risks
- Data center and grid projects are delayed, canceled, or convert from backlog more slowly than expected.
- New factories and capacity ramp-up are not smooth, leading to cost overruns or delayed margin recovery.
- Inflation in copper, electronics, rare earths, memory, and other inputs.
- Tariffs and supply chain disruptions weaken price-cost pass-through.
- Residential HVAC, pools, commercial real estate, and traditional industrial demand in Europe remain weak.
- Price competition in the China market continues and pressures margins in industrial technology businesses.
- High growth expectations have already been reflected in valuations, and modest operating data misses could trigger large share price volatility.
- M&A synergies, business integration, or potential separations fail to achieve expected returns.
What to watch
- Whether ETN’s electrical business book-to-bill ratio can remain above 1x in the second half of 2026, and whether fourth-quarter margins can reach approximately 32% to 32.5%.
- The conversion pace of CARR’s approximately USD 3.0 billion to USD 3.5 billion data center backlog and the actual impact of new capacity on margins.
- GEV’s update on gas turbine pricing and backlog margins in the fourth quarter of 2026.
- Data center capacity expansion, liquid cooling penetration, and international project conversion at NVT, VRT, and WTS.
- BMI’s 2027 water budgets, bidding activity, and the launch status of nine large projects.
- OTIS customer retention, service quality, and progress in fourth-quarter service margin recovery.
- Whether a broader recovery emerges in residential HVAC, European industrial markets, and China.
- Whether 2027 volume leverage, productivity, and restructuring savings can offset 2026 expansion and cost pressures.