Investment bank Oppenheimer recommends stocks: Modine Manufacturing Company (MOD.US) and Caterpillar Incorporated (CAT.US) as the top choices for AI data center construction.

Investment bank Oppenheimer said on Tuesday that the next phase of the industrial efficiency cycle is increasingly showing two major diverging trends: accelerating demand for AI infrastructure and continued weakness in the residential construction and HVAC markets. In the firm's "Industrial Innovation Outlook for the Third Quarter of 2025" released on October 14, analysts raised target stock prices for several key companies in the data center and automation sectors, while downgrading the rating for Carrier Global (CARR.US) due to short-term profit risks. Analyst Noah Kay said, "Industrial efficiency stocks related to AI infrastructure are performing strongly, while stocks related to construction and residential markets are continuing to lag. We expect the third quarter to confirm this trend." Key recommendations and rating adjustments Oppenheimer's top picks are Modine Manufacturing Company (MOD.US) and Carter's Incorporated, both rated "outperform the market." The company also reiterated "outperform the market" ratings for AAON (AAON.US), Vertex Technology (VRT.US), and Rockwell Automation, Inc. (ROK.US), and downgraded Carrier from "outperform the market" to "neutral" due to reduced profit estimates and weakened recovery momentum. The company raised target prices for several companies focusing on data center business: AAON: raised from $105 to $112 Modine Manufacturing Company: raised from $145 to $180 Rockwell Automation, Inc.: raised from $363 to $365 Vertex Technology: raised from $151 to $190 AI infrastructure development momentum Oppenheimer emphasized the strong upward trend in AI-driven capital expenditure, pointing out a 23% growth in capital expenditure forecasts for large-scale enterprises from 2025 to 2028. Analysts expect this to benefit companies providing thermal management and automation solutions for data centers. "The ratio of planned to deployed data center capacity is at multi-year highs," the report said. "These trends, along with an improvement in the year-on-year base, support strong order growth for Vertex Technology, AAON, Trane Technologies plc's HVAC sector, and Modine Manufacturing Company's data center business (45% growth target for 2026 fiscal year)." Weakness in the construction market and prospects for HVAC recovery In contrast, companies involved in residential HVAC and construction markets continue to face resistance due to sluggish housing activity and demand downturns caused by weather factors. Oppenheimer assumes a multi-year recovery phase for this sector until 2026. Analysts noted that Lennox International Inc. (LII.US) is in the best position in the final rebound, while Carrier, Trane Technologies plc (TT.US), and Johnson Controls International plc (JCI.US) face short-term profit expectation pressure due to destocking and tariff-related costs. "We believe 2025 is a transition year," the report stated. "While residential HVAC stocks are under pressure, bottoming out data indicates potentially favorable year-on-year bases and pricing power by the end of 2026." Tariff risks reappear The latest tariff announcements from the U.S., including expanded Section 232 provisions and the International Emergency Economic Powers Act, could disrupt cost structures in the industrial and HVAC industries. Oppenheimer expects the earnings season to reignite discussions on pricing and costs, especially for Carter's Incorporated and Carrier. "Before the news released by the White House last Friday, the market had largely absorbed the impact of tariffs," the company pointed out. "Now, with the expansion of measures, updated annual performance guidance is likely to reflect a renewed debate on pricing/costs." Valuation and long-term focus Despite high short-term valuations, Oppenheimer says investors are increasingly looking beyond 2027 and favor companies with strong long-term profit margin expansion prospects. "We continue to favor enterprises with outstanding revenue growth and profit margin enhancement trajectories," the analyst wrote. Key stocks Modine Manufacturing Company (MOD.US): reiterated "outperform the market" with a target price raised to $180. Oppenheimer expects its brownfield production capacity expansion in the U.S. and Europe, Middle East, and Africa to support its goal of achieving $2 billion in data center revenue by the 2028 fiscal year. Carter's Incorporated (CAT.US): "outperform the market," target price of $513. The company is listed as a top pick by Oppenheimer, citing strong infrastructure demand, stable mining trends, and pricing power in energy and transportation sectors. Carrier (CARR.US): downgraded from "outperform the market" to "neutral" due to destocking and weakness in the Europe, Middle East, and Africa markets; previously $75 target price canceled. Vertex Technology (VRT.US): "outperform the market," target price raised to $190, reflecting upside potential related to European, Middle East, and Africa profit margin recovery and recent leadership changes. Rockwell Automation, Inc. (ROK.US): "outperform the market," target price of $365, due to potential for mid-term profit margin expansion and solid visibility of unfilled orders. Oppenheimer's macro team noted that the U.S. manufacturing sector is still in a contraction phase, while the global purchasing managers' index has slightly shifted towards expansion, led by China and Europe. Analysts expect construction and mining activities to remain uneven until early 2026, with capital expenditure growth in AI infrastructure and some energy sectors offsetting broader industrial softness. In conclusion, despite the short-term imbalance, capital investments driven by AI and automation continue to represent the most sustainable growth opportunities in the industrial sector.