Case Study
Comfort Systems USA
(Intro)
Buy Alert | 4/26/2024
Imagine life without air conditioning (A/C) or heating. Most places would be very uncomfortable and borderline unhabitable. Imagine the money you would spend if your A/C goes out to get it back on quickly (especially in a hot climate). The lengths some companies have to go to ensure the air and heating required for them to continue uninterrupted. Now think about a company that is the largest publicly traded company to install, renovate, and repair those systems along with electrical and plumbing components. A company like that would be indefinitely secure financially. The company you’re imagining is Comfort Systems USA (FIX). FIX is a lead building and service provider for mechanical, electrical, and plumbing systems based in Houston, Texas. Through organic growth and strategic acquisitions, this company has laid the foundation to be pivotal for new and ongoing construction and maintenance that the United States (U.S.) needs to function.
FIX’s main business is mechanical, also known as heating and air conditioning. This is their bread and butter, but they also do electrical work (about 25% of their sales). They also provide plumbing services, though because the plumbing segment is so small, they don’t even categorize it in their financials. FIX, composed of more than 45 operating companies, has 176 locations in 134 cities. As you can see below, they have plenty of room to expand and grow into the future.
Their sales revenue is also spread out amongst several industries. Their main contracts are in new construction. This has been particularly profitable with the massive demand for data centers which need an insane amount of air conditioning that cannot be interrupted for fear of overheating that leads to data loss. They’re also going to have massive tailwinds as the U.S. is planning on increasing infrastructure and bringing a large amount of industry back stateside.
The company has been increasing the sales of modular. This is where they build massive, movable air units at their warehouses, and then move them onsite once complete. This surprisingly causes a massive reduction on expenses because they can control the build better and have cheaper labor costs in one location; rather than having to build them onsite where they need different licensed personnel with higher wages, working in an unfamiliar area.
Due to the size and resources of FIX, they’re also able to out-compete smaller companies on the larger, more profitable jobs. This comes with secondary benefits as they can get priority on the very important services and maintenance contracts that provide future sales. When considering sales, it would be simpler for a customer to go with FIX for the mechanical, electrical, and future service contracts rather than piece mail it together from several different companies. The only way a smaller competitor could win the bid is with a lower price, but considering that FIX has lower costs by economy of scale, that might be difficult to do. Because the jobs they bid for are massive undertakings, I find it improbable that customers will go with a bid that is slightly lower and run the risk of a job being delayed, or worse, done incorrectly to save a few dollars on the price.
They’ve been working hard to increase their service maintenance sales. Comparatively, this is a very small portion of sales ($5.2 billion total 2023 sales and $165 million in service maintenance). This is important because this is recurring revenue and long-term contracts. The more systems they install should increase the number of customers that have FIX also handle the service maintenance on an ongoing basis.
Comfort Systems USA (FIX) has created a compounding machine in an absolutely essential industry. There is no risk of their sales getting outsourced, loss to AI, or replaced by new technology. There is no risk of bankruptcy and management has shown to be very capable with capital allocation. There is massive growth within their main segments of mechanical, and even more so with their electrical, plumbing, and service maintenance segments. Buying this stock under $320 makes you an owner to all this at a very fair price for what looks to be an overlooked, fantastic company.
Hold Alert | 5/4/2024
We are still holding FIX since our buy alert was issued on APR 26, 2024. Even though it hasn’t been that long, they did recently have their earnings and I wanted to share. They had positive increases across every measurable metric for Q1 2024 compared to Q1 2023. It just reiterates how strong this company is.
One thing to note is the increase in backlog, at $5.9 billion. This is work that they’ve been contracted to complete. The industry has more work than they know what to do with and this enables them to take on only the most profitable jobs and even turn away less desirable jobs. Not too many companies can do that. Click here for their financial reports.
Sell Alert |
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