Advanced Data Center Cooling And Automation Will Drive Long-Term Efficiency

Key Takeaways

• Strategic investments and operational improvements are expected to drive production efficiency, margin recovery, and long-term operating leverage as capacity expands.
  
• Strong demand in data centers and energy-efficient HVAC products boosts competitive positioning, enabling pricing power and supporting sustained revenue and margin growth.
  
• Operational inefficiencies from system rollouts, high capital spending, market cyclicality, and cost pressures threaten margin expansion and earnings growth amid uncertain demand.

Catalysts

Engages in engineering, manufacturing, marketing, and selling air conditioning and heating equipment in the United States and Canada.

• The company is overcoming short-term operational disruptions related to its ERP rollout, with visible progress in production efficiency and a strong, favorably priced backlog-supporting expectations for accelerating top-line growth and margin recovery in the second half of 2025 and into 2026. (Impacts revenue and gross margins)
  
• Rapid growth in the data center market, driven by demand for advanced cooling solutions (liquid cooling, custom chillers), is fueling significant BasX brand order wins and partnerships (such as Applied Digital), positioning AAON to capitalize on long-term technology and infrastructure spending. (Impacts revenue and earnings)
  
• AAON's product mix is increasingly aligned with customer priorities for high-efficiency HVAC, heat pumps, and indoor air quality, as evidenced by surging bookings for Alpha Class heat pumps and national account wins-reflecting strong competitive differentiation and pricing power in response to regulatory and environmental trends. (Impacts revenue and net margins)
  
• Ongoing investments in new manufacturing capacity and automation (e.g., the Memphis facility) are expected to nearly double BasX capacity by year-end, removing current operational constraints and shifting from near-term cost drag to profit contribution by 2026 as orders ramp, supporting long-term operating leverage. (Impacts margins and earnings)
  
• Customers' focus on energy efficiency, decarbonization, and technology integration is expected to support sustained long-term demand for AAON's premium HVAC offerings and controls, while the company's ability to pass through price increases and surcharges is now reflected in its backlog, positioning for higher future margins. (Impacts gross margins and earnings)

AAON Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming AAON's revenue will grow by 15.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.7% today to 14.7% in 3 years time.
• Analysts expect earnings to reach $283.0 million (and earnings per share of $3.35) by about September 2028, up from $122.1 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 35.1x on those 2028 earnings, down from 52.2x today. This future PE is greater than the current PE for the US Building industry at 23.0x.
• Analysts expect the number of shares outstanding to grow by 0.31% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.16%, as per the Simply Wall St company report.

AAON Future Earnings Per Share Growth

Risks

• Prolonged and disruptive ERP implementation across multiple sites has significantly reduced production efficiency and caused material gross margin compression; ongoing system rollouts through 2026 present continued risk of operational setbacks, which could negatively impact both near-term and long-term earnings and margin expansion targets.
  
• Substantial capital expenditures and working capital needs-especially related to scaling BasX manufacturing and standing up the Memphis facility-are creating persistent cash flow pressures and will continue to weigh on net margins and returns on invested capital until full utilization and efficiency are reached.
  
• The rapid growth in data center product lines exposes AAON to cyclicality and technological shifts in that end-market; any slowdown in hyperscale or AI data center investment, or disruption from new cooling technologies, could adversely affect revenue growth and future backlog quality.
  
• Lingering softness in nonresidential construction and rooftop HVAC markets, compounded by high interest rates and longer recovery timeframes, may suppress demand for AAON's core products, pressuring revenue and potentially leading to underutilization of new capacity.
  
• Sustained increases in SG&A (from training, consulting, technology, and ramping new accounts), labor cost inflation, and startup inefficiencies threaten to erode operating leverage and delay the achievement of long-term gross margin and earnings growth objectives.

Valuation

• The analysts have a consensus price target of $95.75 for AAON based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $105.0, and the most bearish reporting a price target of just $85.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.9 billion, earnings will come to $283.0 million, and it would be trading on a PE ratio of 35.1x, assuming you use a discount rate of 8.2%.
• Given the current share price of $78.16, the analyst price target of $95.75 is 18.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.