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In the first quarter of 2024, Comfort Systems demonstrated impressive financial performance, solidifying its position in the HVAC and mechanical services market. Earnings per share (EPS) increased 78.1% year over year and exceeded the Zacks Consensus Estimate by 21.6%. Its backlog saw a notable 33% increase and generated more than $140 million in cash flow. The Mechanical business improved significantly, and the Electrical segment profitability reached new highs. Both construction and service sectors thrived, driving growth. EBITDA nearly doubled to $170 million from $90 million, with same-store EBITDA up more than 70%. The operating margin rose to 8.8% from 6.0%, boosted by better gross profit margins and favorable SG&A leverage.
Comfort Systems has an impressive track record of surpassing earnings expectations, exceeding the consensus mark in each of the last four quarters. The average surprise over this period is 20%, as shown in the chart below.
Image Source: Zacks Investment Research
Trend in Estimate Revision
The Zacks Consensus Estimate for the second-quarter EPS has increased to $3.11 from $3.04 over the past seven days. The estimated figure indicates a 61.1% increase from the year-ago EPS of $1.93. Also, the consensus mark for revenues is $1.66 billion, indicating 27.7% year-over-year growth.
Image Source: Zacks Investment Research
What Our Model Indicates
Our proven model predicts an earnings beat for FIX this time around. The company possesses the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — to increase the odds of an earnings beat.
Earnings ESP: FIX has an Earnings ESP of +2.25%. You can uncover the best stocks before they’re reported with our Earnings ESP Filter.
Comfort Systems is expected to witness growth in the second quarter of 2024, driven by strong demand in the technology and manufacturing sectors. Its Mechanical segment (which accounted for 77.2% of its first-quarter total revenues) and the Electrical segment (22.9% of its total revenues) have been benefiting from solid demand, particularly data centers, chip plants, food, and pharmaceuticals. The company's backlog is strategically aligned with high-demand areas such as data centers, chip fabrication, battery plants, life sciences, and food, positioning FIX to capitalize on sector-specific growth trends.
Acquisitions have also played a crucial role in Comfort Systems’ growth, broadening its operational scope and enhancing revenue streams. The company's focus on strategic investments for improved profitability and efficient service execution, coupled with accretive buyouts, is expected to drive substantial growth in the second quarter.
Meanwhile, the company’s bottom line is likely to have witnessed solid year-over-year growth in the second quarter thanks to the leverage from increased revenues accompanied by operational excellence and capital allocation strategies.
Going forward, Comfort Systems’ strategic moves toward piloting emerging technologies, engaging in partnerships with industry-leading tech firms and data analytics are likely to have sparked its growth momentum in the to-be-reported quarter and beyond.
Price Performance & Valuation
FIX’s stock has exhibited an upward movement in the year-to-date period. The stock has gained 54.4% compared with the industry’s rise of 19.7% in the same time frame.
YTD Price Performance
Image Source: Zacks Investment Research
Let's assess the value FIX offers to investors at its current levels.
Presently, FIX is trading at a forward 12-month earnings multiple of 23.97X, which is above its five-year median of 19.3X. In comparison, the industry's forward earnings multiple is 32.93X. This suggests that while FIX’s valuation appears somewhat high relative to its own historical range, it remains slightly undervalued when compared to the industry average.
The company is trading currently at a discount compared to similar industry players like Watsco, Inc. (WSO - Free Report) and AAON, Inc. (AAON - Free Report) but is premium to EMCOR Group, Inc. (EME - Free Report) .
Image Source: Zacks Investment Research
Investment Thoughts
Comfort Systems presents a compelling investment opportunity, despite facing tougher prior-year comparable results for the remainder of 2024. The company is expected to maintain strong gross margins, even with potential fluctuations due to amortization and purchase-related adjustments. Additionally, the normalization of pre-bookings and equipment advances might pose future cash flow challenges, but the company's strategic approach and resilient same-store activity provide a solid foundation.
One of the most attractive aspects of FIX is its commitment to shareholder rewards. Over the past 16 years, Comfort Systems has consistently allocated an average of 11% of its capital toward dividend payments. With steady free cash flow and a resilient balance sheet, the company has increased its dividend payout for 12 consecutive years.
As of the first quarter of 2024, operating cash flow exceeded earnings by approximately $300 million on a trailing 12-month basis. This financial strength allows the company to invest in growth and acquisitions while reducing interest costs, even after significant cash payments for recent acquisitions. Notably, total debt stood at $90 million, with no funded debt from banks as of Mar 31, 2024.
In conclusion, despite short-term challenges, Comfort Systems’ strategic acquisitions, record backlog, and impressive valuation make it a compelling investment opportunity. The company's strategic cash management and commitment to shareholder rewards underscore its long-term growth potential. Investors should consider FIX stock as a strong contender in their portfolio ahead of the second-quarter earnings report.
Image: Bigstock
Is Comfort Systems (FIX) Stock a Buy Before Q2 Earnings?
Comfort Systems USA, Inc. (FIX - Free Report) is scheduled to report second-quarter 2024 results on Jul 25, after the closing bell.
In the first quarter of 2024, Comfort Systems demonstrated impressive financial performance, solidifying its position in the HVAC and mechanical services market. Earnings per share (EPS) increased 78.1% year over year and exceeded the Zacks Consensus Estimate by 21.6%. Its backlog saw a notable 33% increase and generated more than $140 million in cash flow. The Mechanical business improved significantly, and the Electrical segment profitability reached new highs. Both construction and service sectors thrived, driving growth. EBITDA nearly doubled to $170 million from $90 million, with same-store EBITDA up more than 70%. The operating margin rose to 8.8% from 6.0%, boosted by better gross profit margins and favorable SG&A leverage.
Comfort Systems has an impressive track record of surpassing earnings expectations, exceeding the consensus mark in each of the last four quarters. The average surprise over this period is 20%, as shown in the chart below.
Image Source: Zacks Investment Research
Trend in Estimate Revision
The Zacks Consensus Estimate for the second-quarter EPS has increased to $3.11 from $3.04 over the past seven days. The estimated figure indicates a 61.1% increase from the year-ago EPS of $1.93. Also, the consensus mark for revenues is $1.66 billion, indicating 27.7% year-over-year growth.
Image Source: Zacks Investment Research
What Our Model Indicates
Our proven model predicts an earnings beat for FIX this time around. The company possesses the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — to increase the odds of an earnings beat.
Earnings ESP: FIX has an Earnings ESP of +2.25%. You can uncover the best stocks before they’re reported with our Earnings ESP Filter.
Zacks Rank: The company currently carries a Zacks Rank of 2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Factors Influencing Q2 Performance
Comfort Systems is expected to witness growth in the second quarter of 2024, driven by strong demand in the technology and manufacturing sectors. Its Mechanical segment (which accounted for 77.2% of its first-quarter total revenues) and the Electrical segment (22.9% of its total revenues) have been benefiting from solid demand, particularly data centers, chip plants, food, and pharmaceuticals. The company's backlog is strategically aligned with high-demand areas such as data centers, chip fabrication, battery plants, life sciences, and food, positioning FIX to capitalize on sector-specific growth trends.
Acquisitions have also played a crucial role in Comfort Systems’ growth, broadening its operational scope and enhancing revenue streams. The company's focus on strategic investments for improved profitability and efficient service execution, coupled with accretive buyouts, is expected to drive substantial growth in the second quarter.
Meanwhile, the company’s bottom line is likely to have witnessed solid year-over-year growth in the second quarter thanks to the leverage from increased revenues accompanied by operational excellence and capital allocation strategies.
Going forward, Comfort Systems’ strategic moves toward piloting emerging technologies, engaging in partnerships with industry-leading tech firms and data analytics are likely to have sparked its growth momentum in the to-be-reported quarter and beyond.
Price Performance & Valuation
FIX’s stock has exhibited an upward movement in the year-to-date period. The stock has gained 54.4% compared with the industry’s rise of 19.7% in the same time frame.
YTD Price Performance
Image Source: Zacks Investment Research
Let's assess the value FIX offers to investors at its current levels.
Presently, FIX is trading at a forward 12-month earnings multiple of 23.97X, which is above its five-year median of 19.3X. In comparison, the industry's forward earnings multiple is 32.93X. This suggests that while FIX’s valuation appears somewhat high relative to its own historical range, it remains slightly undervalued when compared to the industry average.
The company is trading currently at a discount compared to similar industry players like Watsco, Inc. (WSO - Free Report) and AAON, Inc. (AAON - Free Report) but is premium to EMCOR Group, Inc. (EME - Free Report) .
Image Source: Zacks Investment Research
Investment Thoughts
Comfort Systems presents a compelling investment opportunity, despite facing tougher prior-year comparable results for the remainder of 2024. The company is expected to maintain strong gross margins, even with potential fluctuations due to amortization and purchase-related adjustments. Additionally, the normalization of pre-bookings and equipment advances might pose future cash flow challenges, but the company's strategic approach and resilient same-store activity provide a solid foundation.
One of the most attractive aspects of FIX is its commitment to shareholder rewards. Over the past 16 years, Comfort Systems has consistently allocated an average of 11% of its capital toward dividend payments. With steady free cash flow and a resilient balance sheet, the company has increased its dividend payout for 12 consecutive years.
As of the first quarter of 2024, operating cash flow exceeded earnings by approximately $300 million on a trailing 12-month basis. This financial strength allows the company to invest in growth and acquisitions while reducing interest costs, even after significant cash payments for recent acquisitions. Notably, total debt stood at $90 million, with no funded debt from banks as of Mar 31, 2024.
In conclusion, despite short-term challenges, Comfort Systems’ strategic acquisitions, record backlog, and impressive valuation make it a compelling investment opportunity. The company's strategic cash management and commitment to shareholder rewards underscore its long-term growth potential. Investors should consider FIX stock as a strong contender in their portfolio ahead of the second-quarter earnings report.
Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.