J.P. Morgan: SPX Technologies: Higher data center demand forecasts, while expansion costs temporarily weigh on margins

Why were data center growth expectations raised?

The company expects data center revenue to grow 125% year over year in 2026, above its previous forecast of 115%; this growth rate excludes the acquired FIS and Neptronic businesses, both of which also have substantial data center exposure.
JPMorgan expects a faster ramp to full data center capacity of 1.1 billion dollars and has therefore raised its growth forecasts for 2027 and 2028. Backlog at the end of the third quarter grew organically by 15% quarter over quarter to 1.1 billion dollars, and management expects further sequential growth.
Outside data centers, management reported solid growth across several HVAC businesses; these areas account for about 85% of the segment and support overall growth.

Supply chain constraints and rapid expansion are causing efficiency losses. The company is hiring and bringing some previously outsourced material procurement in-house to meet data center demand; management estimates that higher input costs will add approximately 10 million dollars in costs in the second half of 2026.
The company said it has encountered no resistance to price increases so far and expects incremental revenue from 2026 price increases to offset higher costs in dollar terms. JPMorgan expects the margin effects of price and cost changes to offset each other only by 2027.
Management quantified growth-related inefficiency costs in the second half of 2026 at approximately 15 million dollars. The bank assumes some of these costs will persist into the first half of 2027 and, on that basis, expects the HVAC segment margin to improve by approximately 1 percentage point in 2027.
The Detection and Measurement segment faces the opposite comparison: in 2026, it benefited from a favorable product mix and the resolution of a customer matter. Management estimates that the approximately 1.7 percentage-point margin benefit from these factors will fade the following year.

JPMorgan maintained its 2026 earnings forecast and raised its forecasts for 2027 and 2028; it expects adjusted earnings per share of 8.42, 9.92 and 11.40 dollars, respectively, approximately 1%, 2.5% and 4.5% above consensus.
In the bank's 2027 earnings-per-share forecast, approximately 1.34 dollars of the increase comes from organic growth and 0.61 dollars from acquisitions; items including interest on additional acquisition debt offset part of the increase.
Pro forma net leverage was 1.8 times at the end of the third quarter. JPMorgan expects it to fall to approximately 1 times in 2027, leaving room for further acquisitions; in an illustrative scenario involving full use of capital, 2027 earnings per share could reach 10.91 dollars, approximately 10% above its base forecast.

JPMorgan maintained its Overweight rating and 225 dollar price target for December 2027, based on a price-to-earnings multiple of 20 times forecast 2028 earnings per share, a premium of approximately 5%–10% to the industry average of 18.8 times cited in the report.
In the bank's data center downside scenario, related sales growth slows markedly in 2028, and sales decline by 30% in each of 2029 and 2030; SPX Technologies' 2030 earnings per share are 9.81 dollars, approximately 27% below consensus.
The scenario assumes that sales in 2027 and part of 2028 are supported by existing backlog and announced capital expenditure plans from major cloud customers; however, once the cycle weakens, equipment order cycles are typically short and sales could decline rapidly.