Key insights
- Trane Technologies (TT) is positioned as a leader in AI data center cooling solutions, particularly liquid cooling, experiencing rapid growth. TT's vertical integration and focus on the Americas give it an edge over competitors. Strong financials, including record bookings and a large backlog, support growth. However, a high PE ratio presents a valuation concern. Recent price decline may offer an entry point for investors bullish on AI infrastructure.
When looking at first order and second order effects with the datacenter build outs, I found a theme with a difficulty being in a reliable cooling solution. The company that looks to be the leader in the space is Trane Technologies.
Traditional air cooling has hit the limits for data centers.The liquid cooling market is growing at 25-40% annually, roughly 2x the historic data center growth rate. The racks would melt without a better solution and this is where companies like Trane Technologies or Johnson Controls comes in.
Why TT has an edge:
- Vertical solution: chillers, modular plants, liquid-to-chip tech, and a service army. Recently acquired LiquidStack to own the direct-to-chip and immersion cooling tech stack * Johnson Controls (competitor) is dealing with cyberattacks and outages. This is a dealbreaker when operators need 99.999% uptime * Carrier (competitor) is distracted by acquisitions and divestitures * Trane stayed hyper-focused on commercial HVAC in the Americas, where most AI data centers are being built
Financials
- Third consecutive quarter of record bookings, up ~30% * $7.8B backlog, which is roughly 2 years of visible revenue * Individual orders exceeding $100 million * FY 2025 free cash flow of $2.8 billion at 98% conversion * Margins expanding, balance sheet is clean
The catch: Trane trades at 31x PE. This is double the industrial average. In addition, a PEG ratio of ~2.2x. You're paying a premium and betting the AI cooling story has a long runway.
On main financials, this is not a value play yet. It has come down 12% from its highs. However it is the leader in its corner of AI infrastructure. Curious if others have stumbled on TT and just dismissed it cause of PE and PEG ratio.