Accept Comfort Systems USA at a Slower Pace (NYSE:FIX)

A power hitter

I posted mostly positive ware in recent years, assessing the potential of construction and maintenance companies that provide mechanical, electrical, energy, electrical, communication and construction services. Comfort Systems USA (NYSE: FIXED) the stock is the poster child for this sector of the economy. The price has skyrocketed +800% in 5 years and +92% in the last 12 months. It ended August a few dollars shy of the stock’s 52-week high of $358.89 a share. We rate the stock for retail value investors potentially best as a Hold-to-Moderate buying opportunity at this time.

Analyst consensus, like our rating, moved from Buy to Hold last quarter. In our view, investors have confidence in management, but the stock appears to be significantly overvalued today. The stock’s average price target is being exceeded the next six months at about $370-$400 per share.

Growth and profitability

We believe that stocks PULSE increase the price. Comfort’s total return is more than 3x YTD (72.34%) than the S&P 500’s total return (+19.53%). The S&P 500’s 5-year total return is 109.29%, compared to 843.57% for the Comfort System.

Comfort Systems USA is a relatively young public company, just over a quarter of a century old. Comfort Systems USA started with 12 operating companies and today has 45 companies across America. Management adopted an aggressive mergers and acquisitions strategyacquiring over 20 facilities management and energy efficient technology firms, including 5 in recent years. Management points out in comments to shareholders that margins for the mechanical and electrical segments were outstanding. This quarterly report boosted the momentum.

Here are others highlights:

• The company PROVIDED 5-year annual growth and revenue at ~20%.
• 5-year EPS growth will be higher, exceeding 24.5%.
• Net income was $134 million in 2Q24, up from $69.5 million/year.
• Diluted EPS in ’24 nearly doubled to $3.74, compared to $1.93.
• Revenue was $1.81 billion, compared with $1.3 billion a year earlier in the second quarter; revenues are primarily generated from new construction installation and maintenance services for existing buildings.
• Operating cash flow increased by $64.5 million to $189.9 million from $125.4 million in Q2 ’23.
• Net income was $230.3 million or $6.43 diluted EPS; both are up from Q2 ’23 by about 45%.
• We expect more new contracts signed, work completed and backlog fulfilled in Q3 ’24 and Q4; margins will hold steady at ~20%.
• Q3 ’24 EPS will significantly beat Q2 ’24 by as much as 20 cents (~$3.95 EPS) and over $1 more than Q3 ’23 EPS of $2.74. The company has beaten EPS expectations in each of the last 9 quarters.
• The company’s backlog rose to $5.22 billion from $4.19 billion between June ’24 and June ’23, a year when analysts anticipated a slowdown in sales of construction equipment, labor shortages and, in general weaker conditions in the construction equipment sector 2024.
• Comfort’s next earnings announcement will be on October 24, 2024.

Headwinds and valuation

We argue that most of the good news has already been factored into the share price momentum. There are no titanic or inexorable risks that we or others foresee. The short interest is only 1.5%. However, as the share price has risen, we face an upset for several reasons:

• inventories volatility (Beta 1.13) raises our eyebrows.
• There are defaults risks the construction sector will grow more gently in 2024 and 2025.
• A new study reported in Construction News claims inflation in construction projects will remain at 5% to 6% annually for the next 2/5 years; in our experience, this increases costs and eats into bottom line profits on contracts still in place.
• Labor shortages still plague the construction industry, architectural firms are taking longer to complete projects, and increasing difficulties in processing permits and zoning due to environmental restrictions, community opposition, and state and local budget cuts are slowing the pace of construction starts and completions.
• YTD corporate insiders have sold significantly more shares than they bought. Number of hedge funds that own stocks doubled between 2020 and Q2 ’24, but have reduced their holdings by nearly 100,000 shares over the past three months.

Comfort Systems is dedicated to the popular trend of REDEMPTION stocks instead of increasing their dividend yield (FWD) which traditionally attracts retail value investors. With a small boost to the stock price, the low dividend yield will lead to more stock sales. The dividend it gets high marks for safety, consistency, and growth, but a D- for yield. Compared to industry sector market values, Comfort’s dividend values ​​stand out a poor man and year-end yields have declined since 2014.

Comfort System’s ratings are weaker than the nation’s industrial sector ratings. Seeking Alpha’s Quant Rating has been at a hold level for at least the past 24 months, with a few near-term exceptions.

PE-to-GAAP (TTM & FWD) is graduated close to failure, as are EV-to-EBITDA and Price-to-Book. Price-to-cash flowprice-sales and a few other metrics are mediocre. Despite the M&A and share buyback program, the company’s long-term debt is decreasing, shareholders’ equity is increasing, and the debt-to-equity ratio is acceptable; management uses debt wisely. But debt can become a headwind. In 2022, management “amended its existing senior debt facility to increase the credit commitment amount to $850,000,000 and extend the term to July 5, 2027.”

Comfort’s long-term debt to equity (FY) ratio is 3.08, while 2 and below is more satisfactory ratio. Cash exceeds company debt; cash flow from operations covers debt payments and EBIT covers interest payments. His quick ratio is 1.07 below the 1.1 threshold. The current ratio of assets to liabilities is 1.11. At a minimum PE of 25.62 times the consensus forecast for FY ’24 EPS of 13.20, the fair value per share is ~$338 each, less than the stock’s current price during the period of increasing momentum. Multiply comfortable Average peer PE of 30 takes the stock price to $396.

Take away

An analyst once lamented that it’s not the losses that bother him, but the missed opportunities. Comfort Systems was a missed opportunity for us and other small investors. The lack of a robust dividend yield and rising debt in the years of inflation have turned us off the stock. Management’s success was building equity and reducing debt. Comfort has enjoyed strong growth and low-risk profitability. There may be headwinds, but we are confident that management will be able to handle them. The current share price is on the low side of fair value for retail investors, who can generate much higher dividend yields elsewhere. We rate the stock a moderate buy hold if an investor is willing to bet that momentum will drive the stock higher even though insiders are selling.