Can MOD Translate its Strong Sales Growth Into Higher Margins?

Modine Manufacturing MOD is delivering strong revenue growth, particularly from its booming data center business. But can the company translate that growth into meaningful margin expansion? Its last quarter results suggest there is still work to do.

Modine’s first-quarter fiscal 2027 revenue rose 28% year over year to $874.1 million, while adjusted EPS jumped 44% to $1.53. Yet gross margin declined 340 basis points (bps) to 20.8%, while adjusted EBITDA margin fell 270 bps to 12.2%.

Data Centers: Growth Outpacing Profitability

The biggest drag was the Data Centers business. Although segment revenue surged 90%, its adjusted EBITDA margin dropped to 14.8% from 22.1% a year earlier. Component shortages limited production and created labor inefficiencies and under-absorbed overhead. These issues reduced the segment’s margin by roughly 450-550 bps.

Modine views these pressures as temporary and expects Data Center margins to recover to 19-20% in the fiscal second quarter as component availability improves and production becomes more efficient. The company is also expanding supplier capacity and preparing its facilities to handle the strong demand reflected in its growing backlog.

Commercial HVAC: Buyouts Fuel Growth, Dilute Margins

Commercial HVAC sales rose 22% to $261.6 million, helped by higher coil sales to data center customers and $19.7 million of incremental revenue from acquired businesses. Organic sales grew a more modest 6%.

But adjusted EBITDA margin slipped to 15.9% from 18.1%, pressured by acquisition-related business mix, manufacturing consolidation inefficiencies and a greater share of lower-margin coil sales.

Management expects the segment's margin to improve sequentially through fiscal 2027. But for now, HVAC is telling a similar story to Data Centers: strong demand, growth outpacing profitability.

Performance Technologies: Weak Demand Meets Rising Costs

Performance Technologies is battling both sales and margin headwinds. Revenue declined 3% to $277.8 million, as weak automotive and commercial vehicle demand outweighed higher sales to power-generation customers, with organic sales down 4%.

Adjusted EBITDA fell 3% to $36.2 million and margin edged down 10 bps to 13%, as higher material and tariff costs outpaced contractual cost recoveries— though a $2 million reduction in SG&A partly offset the impact.

Unlike Data Centers and HVAC, this segment's challenge isn't converting growth into margin— it's stabilizing a shrinking base while inflation works against it.

Modine's Playbook for Closing the Margin Gap

To address these pressures across the portfolio, Modine is consolidating product lines and manufacturing operations in Commercial HVAC while taking pricing actions to offset higher material and tariff costs. More broadly, the company's 80/20 strategy is simplifying operations and directing resources toward higher-return products and customers.

These initiatives are important because the company targets $650-$680 million in adjusted EBITDA for fiscal 2027, representing roughly 38-44% growth, along with at least 100-200 bps of margin expansion. It expects profitability to improve sequentially as data center volumes increase and cost-recovery measures take effect.

For investors, the next few quarters will therefore be critical. Modine has already demonstrated that it can generate impressive growth. The bigger test is whether supply-chain constraints ease quickly enough and whether HVAC and 80/20 initiatives gain enough traction for that growth to flow through to the bottom line across all three segments. Margins, not sales, will be the number to watch over Modine's next quarters.

How MOD Stacks Up Against the Competition

Vertiv Holdings VRT: Its net sales rose 24.1% year over year to $3.27 billion in the last reported quarter, with organic growth of 18% supplemented by acquisitions and foreign exchange. Vertiv's profitability has kept pace with its top line. Its adjusted operating margin expanded 410 bps to 22.6%. Vertiv attributed the improvement to operational execution, productivity gains and favorable price-cost dynamics, even as tariffs and continued capacity and R&D investment worked against it.

Eaton Corp ETN: its second-quarter 2026 revenue reached $8.53 billion, driven by 14% organic growth and a 7% contribution from acquisitions, with data centers being a major growth engine alongside broad-based demand across other markets. Eaton’s total segment margin came in at 23.1%, 10 bps above the high end of guidance, but still 80 bps below the prior-year quarter, as acquisition-related effects and higher amortization weighed on profitability. For full-year 2026, Eaton guided segment margins to 24.1-24.5%.

The Zacks Rundown on MOD Stock

Over the past six months, MOD shares are down 14%, while Eaton and Vertiv gained 15% and 8%, respectively.

6-Month Price Performance Comparison

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Modine still trades at a discount to its peers— around 22x forward 12-month earnings, versus roughly 28x for Eaton and 32x for Vertiv.

MOD’s F12M Vs. Eaton & Vertiv

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The Zacks Consensus Estimate for Modine’s fiscal 2027 and 2028 EPS implies year-over-year growth of 52% and 41%, respectively.

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MOD currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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