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5 Factors That Underscore Comfort Systems' Solid Prospects

Zacks Equity Research

Comfort Systems USA, Inc.’s FIX shares have been rallying high, courtesy of strong execution of operations, inorganic drive and improving housing market fundamentals in the United States.

Shares of this leading provider of mechanical services —  including heating, ventilation, air conditioning, plumbing, piping and controls — have gained 32.4% in the past three months against the Zacks Building Products - Air Conditioner and Heating industry’s 4.3% decline. The price performance was backed by the company’s robust earnings surprise history, having surpassed the Zacks Consensus Estimate in four of the trailing seven quarters. Its revenues also surpassed the consensus mark in six of the trailing seven quarters.

Earnings estimates for 2019 and 2020 have moved 7.4% and 6.1% north, respectively, in the past 60 days. This positive trend signifies bullish analysts’ sentiments and justifies the company’s Zacks Rank #1 (Strong Buy), indicating robust fundamentals and the expectation of outperformance in the near term. You can see the complete list of today’s Zacks #1 Rank stocks here.

 


Let us delve deeper into other factors that make this stock a profitable pick.

What Makes the Stock an Attractive Pick?

Strong Backlog: Comfort Systems — which shares space with AAON, Inc. AAON, Watsco, Inc. WSO and Lennox International, Inc. LII in same industry — has impressive revenue prospects, given solid backlog level. Backlog as of Sep 30, 2019 was $1.61 billion compared with $1.50 billion and $1.25 billion as of Sep 30, 2018 and Jun 30, 2019, respectively.

Given the backlog level, the company expects low to mid-single digit revenue growth, on a same-store basis, for fourth-quarter 2019 and the first half of 2020. Comfort Systems has been experiencing a solid pricing environment. It remains optimistic about revenue and earnings growth in the fourth quarter of 2019. It expects the trend to continue in 2020, with top and bottom-line growth to be similar to the levels that it had experienced at the start of 2018.

Solid Construction Fundamentals: Construction contributes 76% of its total revenues, with 44% and 32% from construction projects for new and existing buildings, respectively. Impressive business fundamentals in nonresidential construction have been benefiting the company to post solid results. Geographically, it experienced strong results in most of the markets served, particularly in North Carolina, Florida, Texas and Wisconsin.

Meanwhile, housing market has been experiencing higher demand, courtesy of lower mortgage rates and solid job market. A string of companies from various sectors such as heating, ventilation and air conditioning to interior design and furnishing are bound to get a boost from the housing market’s underlying strength.

During the first nine months of 2019, total revenues increased 18.9% year over year and same-store revenues were up 3%.

Strong Inorganic Drive: Comfort Systems follows a systematic inorganic strategy to drive growth. This year’s notable acquisition was of Walker TX Holding Company, LLC. On Apr 1, 2019, it acquired Walker TX Holding Company, LLC — a full-service electrical contracting and network infrastructure engineering business — and its subsidiaries. Walker serves commercial and industrial clients, and has operations throughout the state of Texas. As a result of the buyout, Walker is a wholly-owned subsidiary of Comfort Systems under its electrical services segment. Walker contributed $203.1 million to total revenues during the first six months from the acquisition date.

In addition to the Walker acquisition, Comfort Systems completed one acquisition each in the first and second quarters of 2019.

Meanwhile, the company generates solid cash flow, which gives management the opportunity to invest in acquisitions and business development. In the third quarter, free cash flow was $67 million versus $23 million a year ago. In fact, its free cash flow came in at $79 million during the first nine months of 2019. It also paid down more than $50 million of debt in the third quarter.

Solid Growth Prospects: Comfort Systems has solid growth prospects, as is evident from the Zacks Consensus Estimate for 2020 earnings of $3.33 per share, which indicates 15.2% year-over-year growth (higher than the industry average of 8.7%). Overall, it constitutes a great pick in terms of growth investment, supported by a Growth Score of B.

Superior ROE: Comfort Systems’ return on equity (ROE) is indicative of growth potential. The company’s ROE of 20.1% compares favorably with the industry average of 15.1%, implying that it is efficient in using its shareholders’ funds.

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