GRID: Data centre expansion and grid upgrades underpin earnings growth

• Two structural demand drivers are already reflected in financial results. In 1H 2026, GRID’s constituents grew aggregate revenue by approximately 21% and earnings by approximately 31% year-on-year, supported by data centre expansion and grid upgrades.

• Orders support growth visibility. Among the top five holdings with comparable disclosures, backlogs grew faster than revenue, indicating that suppliers are securing future work while delivering existing projects.

• Multi-year customer investment and supplier expansion support sustained growth. Customer plans extend demand beyond the current year. Suppliers are expanding capacity and improving productivity to fulfil projects, while stronger free cash flow supports continued investment.

• Scale and efficiency support further margin improvement. Higher volumes spread fixed costs across more sales, while productivity gains improve profitability. Strong demand and tight capacity support cost pass-through, although pricing adjustments can lag.

• Our forecasts imply approximately 33% upside. We expect index earnings per share (EPS) to grow approximately 36% between 2026 and 2028. Applying a fair price-to-earnings (P/E) ratio of 25x to 2028 earnings gives a GRID target price of USD 226.

The AI investment boom is bringing an old constraint into sharper focus: access to electricity. Data centres need power and cooling, while ageing grids require upgrades to deliver that power reliably. The First Trust NASDAQ Clean Edge Smart Grid Infrastructure Index Fund (NASDAQ: GRID) provides exposure to companies serving both needs.

Data centres and grid upgrades sustain investment

US electricity demand was broadly flat for nearly two decades before rising from 2023, supported by data centres. Major technology companies’ combined capital expenditure is expected to exceed USD 700 billion in 2026, translating into equipment purchases. Access to power remains a major bottleneck.

According to Eaton management, planned US data centre capacity has reached 307 gigawatts (GW), equivalent to around 15 years of construction at the 2025 pace. Whether projects wait for public grid expansion or adopt on-site generation, they require transformers, switchgear, distribution and cooling equipment. Demand therefore extends beyond the facility into generation and electricity networks.

Grid investment also has structural drivers of its own. The 2025 blackout in Spain and Portugal exposed weaknesses in voltage control and reactive power management. Insufficient transmission capacity also forces operators to adjust generation and curtail some lower-cost renewable output. EU transmission operators spent approximately EUR 4.3 billion managing congestion in 2024. These operational problems and economic costs reinforce the need for capacity expansion, equipment replacement and reliability investment.

Multi-year spending plans provide tangible support. The Edison Electric Institute (EEI) expects US electric companies to invest approximately USD 239 billion in 2026 and USD 1.4 trillion over 2026–2030. In the UK, Ofgem approved GBP 10.3 billion of initial transmission investment under RIIO-3, its 2026–2031 network price-control framework, supporting 80 projects. Ageing equipment, renewable connections and electrification broaden demand beyond data centres and extend investment across multiple years.

Financial results validate both growth drivers

Schneider Electric opened the 3Q reporting season for GRID’s five largest holdings with record revenue of EUR 11.5 billion, up 18% on a reported basis. Triple-digit growth in data centre demand strengthened management’s visibility into 2027 and 2028. Strong revenue growth also supported a second upgrade to its full-year targets. Organic revenue growth is now expected at 12%–14%, up from 10%–13%. The target for organic improvement in its adjusted earnings before interest, tax and amortisation (EBITA) margin rose to 100–120 basis points from 70–100.

In 1H 2026, aggregate revenue and earnings among GRID’s constituents increased approximately 21% and 31%, respectively, year-on-year. Its five largest holdings, representing around 41% of the fund, illustrate how demand translates into profits.

Table 1: All five companies have updated guidance.

Note: Revenue growth is reported. Results cover 2Q 2026, equivalent to JCI’s fiscal 3Q, except Schneider: revenue covers 3Q and operating income covers 1H. Growth is year-on-year. JCI guidance covers its financial year ending September 2026. Schneider guidance reflects its 16 October 3Q update. Quanta guidance includes acquisitions completed in 2Q and July.

Source: Company reports, First Trust, iFAST Calculations.

Data as of 16 October 2026.

Data centres remain a key growth driver. In 2Q, Eaton’s Electrical Americas data centre revenue grew approximately 65%. ABB’s Electrification orders increased 58% on a comparable basis, with data centre orders recording triple-digit growth. Schneider’s 3Q Systems sales grew 22%, driven by data centres and supported by infrastructure.

Johnson Controls’ applied commercial air conditioning business grew at a high-teens rate. Its chillers and other large cooling systems remove heat generated by data centre servers. Data centres are expected to account for a high-teens percentage of revenue this year, rising to approximately one-third over three to five years.

Grid investment provides a second, more stable growth stream beyond data centres. Quanta’s core business remains building and upgrading utilities’ transmission and distribution networks, accounting for approximately half of its revenue last year. ABB highlights the need to upgrade ageing grid equipment to reduce outage risks and meet rising electricity demand. Utilities also contribute to Eaton’s order growth. Driven by ageing equipment, renewable energy integration and rising electricity consumption, this demand is backed by multi-year investment plans from utilities.

Margins generally improved, with further scope from scale and efficiency

Margins generally improved, with Quanta Services, JCI and Schneider recording gains supported by higher volumes and efficiency. ABB’s reported margin declined due to higher non-operational charges and foreign exchange and commodity timing effects, but its operational EBITA margin rose 90 basis points to 20.2%. This suggests broader improvement in underlying profitability.

Rising input costs are challenging equipment suppliers, with copper reaching a record high in September. Schneider and Eaton are raising prices to pass on costs. Schneider’s 1H raw material and tariff costs exceeded pricing benefits, but productivity improvements kept gross margin broadly stable. Its adjusted EBITA margin rose approximately 1.1 percentage points to 19.3%. Cost recovery has since accelerated: its 3Q product pricing contribution matched the total for 1H as price increases took effect. Management expects pricing to offset raw material inflation and net tariff costs in value terms for 2026.

Eaton’s 2Q operating margin fell 155 basis points to 16.32%. Eaton’s management also reported that pricing temporarily lagged costs on previously booked orders. Eaton raised prices in 2Q and early 3Q. On its separate segment measure, Electrical Americas’ margin improved 190 basis points sequentially to 27.5%. Management expects pricing to broadly offset cost increases in 2H, with this segment’s margin rising 4.5–5 percentage points from 1H.

Overall, strong demand and tight capacity support cost pass-through, while volume and efficiency gains provide further margin potential.

Supply constraints provide additional margin potential

The five largest companies mainly improve earnings through scale and efficiency. High-voltage and submarine cables, optical fibre, large transformers and gas turbines may also benefit from stronger bargaining power, as production capacity, technical qualifications and delivery resources constrain near-term supply.

For example, lead times for large power transformers have reached up to four years, with some utilities making advance payments to secure production slots.

In July, Prysmian, a GRID holding outside the five largest, signed a ten-year data centre optical cable supply agreement with Molex, worth up to EUR 5.5 billion, with an upfront payment of EUR 550 million. Customers’ willingness to pay in advance to secure supply underscores suppliers’ bargaining power.

These constrained segments represent around 10%–15% of GRID, complementing the approximately 41% in its five largest holdings and providing additional margin potential.

Orders, customer plans and capacity support continued growth

Orders are growing faster than revenue. ABB and JCI grew new orders faster than revenue, while Eaton’s Electrical segment maintained strong rolling order growth. Quanta’s backlog reached USD 53.4 billion, equivalent to approximately 1.6x trailing twelve-month revenue. Suppliers are therefore replenishing future work while delivering existing projects.

Table 2: 2Q’s order trends support continued replenishment of project pipelines.

_{Note: Eaton orders and backlog cover Electrical Americas and Electrical Global: order growth is measured over a rolling 12 months. Eaton’s revenue growth also refers to Electrical Americas and Electrical Global combined. Schneider reported a record 3Q backlog without disclosing its value or growth rate.}

Source: Company reports, iFAST Compilations.

Data as of 16 October 2026.

Customers have multi-year investment plans. Much of the planned US data centre capacity identified by Eaton is scheduled for delivery from 2028 onward. Quanta’s multi-year generation and grid projects with NiSource are expected to begin entering backlog in 2H 2026. ABB’s CEO says major customers have defined investment plans and the company does not accept orders it cannot deliver on schedule.

Suppliers are expanding capacity to meet demand. Eaton is investing over USD 1 billion, while ABB plans approximately USD 200 million for European medium-voltage manufacturing over three years. Schneider is expanding liquid-cooling manufacturing to India, Italy and China, alongside partner capacity. JCI more than quadrupled capacity on a data centre cooling equipment line through production improvements with little additional investment. All five companies grew free cash flow year-on-year, supporting further investment.

Risks

Orders face increasingly demanding comparisons. Eaton’s Electrical Americas backlog growth slowed from 44% in 1Q to 33% in 2Q. Moderation from a high level does not itself imply contraction, but should be assessed alongside new orders, cancellations and guidance.

Margin improvement could be delayed if input costs rise faster than selling prices or capacity ramps disappoint. Customer prepayments also do not guarantee higher profitability, as actual returns depend on contract pricing, costs and execution. Simpler data centre architectures could reduce equipment value per unit of capacity, while acquisitions add financing and integration costs. At approximately 26x our 2026 earnings forecast, valuations incorporate strong growth expectations, leaving share prices exposed if results disappoint.

Earnings growth supports medium-term upside

We remain positive on GRID. Our forecasts use the NASDAQ OMX Clean Edge Smart Grid Infrastructure Net Total Return Index (QGDN). We expect EPS to rise from 72.29 in 2026 to 98.30 in 2028, approximately 36% cumulative growth. Applying a fair P/E of 25x to 2028 earnings gives a GRID target price of USD 226 over the next 12–24 months, implying approximately 33% upside. 

Table 3: Our earnings forecasts and a fair P/E of 25x imply approximately 33% upside.

Source: Bloomberg Finance L.P., iFAST Estimates.

Data as of 16 October 2026.

Declaration

For specific disclosure, at the time of publication of this report, IFPL, through its connected and associated entities, and the analyst who produced this report hold a NIL position in the abovementioned securities.

This research report was prepared with the assistance of artificial intelligence tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation. The content of this report, including all investment theses, ratings, price targets and conclusions, has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.

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