2023-08-08 18:55:02 ET
Summary
- Comfort Systems USA has shown strong revenue and free cash flow growth over the past decade, with a CAGR of 11.80% and 27.74% respectively.
- FIX's growth strategy through strategic acquisitions has allowed it to penetrate new markets and expand its service offerings.
- Despite challenges such as elevated labor costs and supply constraints, FIX has a positive outlook with a healthy pipeline of opportunities and estimated revenue growth of 29% over the next three years.
Intro
Comfort Systems USA, Inc. ( FIX ) is a U.S. company specializing in mechanical and electrical services. They provide a comprehensive range of offerings, including MEP system design, installation, renovation, maintenance, and replacement services. Their expertise extends to HVAC systems, plumbing, electrical services, off-site construction, and fire protection. They cater to clients in the commercial, industrial, and institutional sectors, serving building owners, developers, general contractors, architects, consulting engineers, and property managers.
In this analysis, we will thoroughly assess FIX's financial performance and growth potential. We will examine the company's revenue trends, profitability, and cash flow generation capabilities. By gaining valuable insights into these crucial factors, investors can make well-informed evaluations of FIX's attractiveness as a potential investment in the current market.
Performance
Growth is crucial for a business because it shows that the company is performing well by increasing market share and expanding its operations and reach. For investors, growth is essential as it indicates the potential for higher returns on their investment. FIX has done an excellent job establishing a strong track record of growing its top and bottom lines over the last decade.
FIX has shown steady revenue growth over the years, increasing from $1.35 billion in 2014 to $4.14 billion in 2023, representing a total growth of 205.08%. The compounded annual growth rate ((CAGR)) for revenue during this period was 11.80%.
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Similarly, the company's free cash flow has also improved significantly, rising from just $22.13 million in 2014 to $256.03 million in 2023. This shows a substantial total growth of 1056.94%, with a CAGR of 27.74%.
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FIX's growth strategy has heavily relied on strategic acquisitions, enabling the company to broaden its presence and service offerings. Over the past decade, these acquisitions have allowed FIX to penetrate new markets and capture a larger share of the thriving HVAC industry.
Notably, FIX's recent acquisition of Eldeco, a reputable electrical design and construction services provider based in South Carolina, is projected to contribute annualized revenue of approximately $130M-$140M and EBITDA of $8M-$9M.
Additionally, last year's acquisition of Atlantic Electric, LLC, headquartered in Charleston, South Carolina, with operations in South Carolina and Western North Carolina, is expected to add annualized revenues of around $50M and earnings before interest, taxes, depreciation, and amortization of approximately $5M. These strategic moves highlight FIX's commitment to expansion and position the company for further growth in the HVAC market in my view.
Thanks to a series of these successful mergers, FIX has established an impressive track record of profitability. Over the last decade, the company has consistently achieved an average Return on Equity (ROE) of over 17%. Notably, in 2022, FIX reported its highest ROE in the past ten years, reaching an impressive 26%. This outstanding level of ROE stands as a testament to the company's excellent M&A strategy.
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FIX has been able to consistently attract the top companies in their industry for many years now. These companies opt for FIX as their preferred destination because of the company's genuine care for its employees and their well-being. FIX fosters a sense of community, where local teams collaborate with larger project teams to enhance infrastructure in their respective areas. The company's success in the service business is rooted in its dependable and trustworthy employees who are provided with the necessary support and resources to deliver quality work from the very beginning and uphold their commitments.
Outlook
FIX recently announced robust earnings, exceeding expectations with an impressive EPS of $1.99, surpassing estimates by $0.37. Furthermore, the company's quarterly revenue hit $1.30 billion, exhibiting a remarkable year-over-year growth of 27.36% and outpacing expectations by $75.59 million. These stellar results can be attributed to the company operating in one of the most robust demand environments ever witnessed, enabling FIX to strategically choose projects with favorable margins and excellent working conditions for its valuable workforce.
The excessive demand environment can be attributed to a couple of factors. Firstly, record levels of heat in 2023 , projected to be one of the hottest years on record, have driven a surge in the need for air conditioning. The soaring temperatures have led to increased demand as people seek relief from the extreme heat.
Secondly, the construction industry faced significant delays during the COVID-19 pandemic. However, with the pandemic situation improving and restrictions easing, construction projects have resumed at a rapid pace. This resurgence in construction activities has contributed to a substantial demand for the company's services.
FIX's recent earnings report reflects a strong and robust financial performance, surpassing both earnings per share and revenue estimates. Additionally, the company's remarkable backlog has reached an unprecedented level of $4.2 billion, indicating a robust pipeline of projects that will drive future revenue growth.
Looking ahead, FIX enjoys a positive outlook, with analysts estimating the company's revenues to climb to $5.3 billion, representing an impressive 29% growth over the next three years. These positive indicators demonstrate FIX's strong position in the market and its potential for continued success in the foreseeable future.
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While the future appears promising for FIX, the company still encounters some noteworthy risks that could potentially impact its financial performance. Although the most severe repercussions of the pandemic have subsided, FIX continues to grapple with elevated labor costs, supply constraints, and rising expenses for materials and equipment. Furthermore, reduced availability and delivery delays of various resources further compound these challenges.
Despite facing these risks, the company is proactively addressing the challenges in its job planning and pricing strategies. It has taken the initiative to order materials earlier than usual and actively collaborate with customers to jointly mitigate supply risks and their impacts.
We are maintaining a positive outlook as the company possesses a robust pipeline of opportunities and potential backlog. Despite ongoing challenges, FIX has generally succeeded in maintaining productivity and efficiently acquiring necessary materials. Taking all these factors into account, we believe the company will continue to report steady earnings and robust cash flow for the remainder of 2023 and throughout 2024, laying a solid foundation for continued growth and success in the upcoming years.
Valuation
To assess FIX's intrinsic value, a discounted cash flow ((DCF)) analysis is employed. Beginning with FIX's initial free cash flow of $256.03 million, an initial growth rate of 19.80% for 2023, 8.67% for 2024, and -1.84% for 2025, based on average analyst revenue growth estimates for the next few years, is applied.
For the subsequent period, we usually use the company's historical growth rate using the average of its compounded revenue and free cash flow growth rates over the last ten years, in this case, it's 20% for FIX. However, we deem this growth rate to be unsustainable, so we'll cap the growth rate at a more conservative 12% for years 4 to 10.
Using a discount rate of 10%, reflecting the average market return with dividends reinvested, and a conservative perpetual growth rate of 2.5%, the intrinsic value of FIX is calculated to be $179.49. This indicates that FIX's current market price is likely fair, presenting investors with neither significant potential return nor loss compared to the company's current market value.
Takeaway
With a strong track record of growth and profitability, FIX has steadily increased its revenue and free cash flow over the last decade, aided by strategic acquisitions that have expanded its market presence and service offerings.
FIX's recent earnings report revealed impressive results, surpassing both earnings per share and revenue estimates. The company's outstanding financial performance can be attributed to operating in a robust demand environment, allowing FIX to strategically select projects with favorable margins and working conditions for its workforce.
While the future appears promising for FIX, the company faces challenges like elevated labor costs, supply constraints, and material expenses. However, FIX is proactively addressing these challenges in its job planning and pricing strategies.
The company has a positive outlook, boasting a healthy pipeline of opportunities and a substantial backlog. Analysts anticipate FIX's revenues to grow by 29% over the next three years, indicating strong growth potential.
Considering all factors, FIX currently appears fairly valued according to the discounted cash flow ((DCF)) analysis. The intrinsic value of FIX is estimated to be $179.49, suggesting that investors may expect neither significant returns nor losses compared to the company's current market price. Based on the current valuation, we recommend a "hold" rating for FIX, as the company's market price aligns closely with its estimated intrinsic value.
For further details see:
Comfort Systems USA, Inc. Already At Fair Value Despite Consistent Growth