HVAC and electrical contractor Comfort Systems USA (NYSE:FIX) missed Wall Street’s revenue expectations in Q3 CY2024, but sales rose 31.5% year on year to $1.81 billion. Its GAAP profit of $4.09 per share was 2.4% above analysts’ consensus estimates.
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Comfort Systems (FIX) Q3 CY2024 Highlights:
- Revenue: $1.81 billion vs analyst estimates of $1.84 billion (1.6% miss)
- EPS: $4.09 vs analyst estimates of $3.99 (2.4% beat)
- EBITDA: $238.3 million vs analyst estimates of $222.3 million (7.2% beat)
- Gross Margin (GAAP): 21.1%, in line with the same quarter last year
- Operating Margin: 11.2%, up from 9.8% in the same quarter last year
- EBITDA Margin: 13.1%, up from 11.3% in the same quarter last year
- Free Cash Flow Margin: 15.6%, up from 13.7% in the same quarter last year
- Backlog: $5.68 billion at quarter end, up 32.5% year on year
- Market Capitalization: $14.65 billion
Brian Lane, Comfort Systems USA’s President and Chief Executive Officer, said, “We are happy to report record earnings and cash flow this quarter, as our employees continue to achieve unmatched execution for our customers. Recently acquired companies exceeded our high expectations, and each of our operating segments excelled in every respect. Quarterly per share earnings were 40% ahead of the same quarter last year, and through nine months our per share earnings were 60% higher than in the same period last year. Cash flow surpassed any previous quarter, and that extraordinary cash flow is both a great base for continued investment and a definite signal of strong underlying trends in our execution, customer relationships, and prospects.”
Company Overview
Having historically grown through organic means as well as acquisitions of numerous peers and competitors, Comfort Systems USA (NYSE:FIX) provides mechanical and electrical contracting services.
Construction and Maintenance Services
Construction and maintenance services companies not only boast technical know-how in specialized areas but also may hold special licenses and permits. Those who work in more regulated areas can enjoy more predictable revenue streams - for example, fire escapes need to be inspected every five years–. More recently, services to address energy efficiency and labor availability are also creating incremental demand. But like the broader industrials sector, construction and maintenance services companies are at the whim of economic cycles as external factors like interest rates can greatly impact the new construction that drives incremental demand for these companies’ offerings.
Sales Growth
Reviewing a company’s long-term performance can reveal insights into its business quality. Any business can have short-term success, but a top-tier one sustains growth for years. Thankfully, Comfort Systems’s 22.2% annualized revenue growth over the last five years was incredible. This is a great starting point for our analysis because it shows Comfort Systems’s offerings resonate with customers.
We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Comfort Systems’s annualized revenue growth of 29.6% over the last two years is above its five-year trend, suggesting its demand was strong and recently accelerated. We note Comfort Systems isn’t alone in its success as the Construction and Maintenance Services industry experienced a boom, with many similar businesses also posting double-digit growth.
We can dig further into the company’s revenue dynamics by analyzing its backlog, or the value of its outstanding orders that have not yet been executed or delivered. Comfort Systems’s backlog reached $5.68 billion in the latest quarter and averaged 43.7% year-on-year growth over the last two years. Because this number is better than its revenue growth, we can see the company accumulated more orders than it could fulfill and deferred revenue to the future. This could imply elevated demand for Comfort Systems’s products and services but raises concerns about capacity constraints. 
This quarter, Comfort Systems pulled off a wonderful 31.5% year-on-year revenue growth rate, but its $1.81 billion of revenue fell short of Wall Street’s rosy estimates.
Looking ahead, sell-side analysts expect revenue to grow 12.4% over the next 12 months, a deceleration versus the last two years. Still, this projection is admirable and indicates the market is factoring in success for its products and services.
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Operating Margin
Comfort Systems was profitable over the last five years but held back by its large cost base. Its average operating margin of 7.7% was weak for an industrials business. This result isn’t too surprising given its low gross margin as a starting point.
On the bright side, Comfort Systems’s annual operating margin rose by 3.3 percentage points over the last five years, as its sales growth gave it operating leverage.
In Q3, Comfort Systems generated an operating profit margin of 11.2%, up 1.4 percentage points year on year. The increase was encouraging, and since its operating margin rose more than its gross margin, we can infer it was recently more efficient with expenses such as marketing, R&D, and administrative overhead.
Earnings Per Share
Analyzing long-term revenue trends tells us about a company’s historical growth, but the long-term change in its earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.
Comfort Systems’s EPS grew at an astounding 37.2% compounded annual growth rate over the last five years, higher than its 22.2% annualized revenue growth. This tells us the company became more profitable as it expanded.
We can take a deeper look into Comfort Systems’s earnings quality to better understand the drivers of its performance. As we mentioned earlier, Comfort Systems’s operating margin expanded by 3.3 percentage points over the last five years. On top of that, its share count shrank by 3.5%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth. 
Like with revenue, we analyze EPS over a more recent period because it can give insight into an emerging theme or development for the business. For Comfort Systems, its two-year annual EPS growth of 43.9% was higher than its five-year trend. We love it when earnings growth accelerates, especially when it accelerates off an already high base.
In Q3, Comfort Systems reported EPS at $4.09, up from $2.93 in the same quarter last year. This print beat analysts’ estimates by 2.4%. Over the next 12 months, Wall Street expects Comfort Systems’s full-year EPS of $13.07 to grow by 13.8%.
Key Takeaways from Comfort Systems’s Q3 Results
We were impressed by how significantly Comfort Systems blew past analysts’ EBITDA expectations this quarter. On the other hand, its revenue and backlog fell short of Wall Street’s estimates, sending shares lower. Overall, this quarter could have been better. The stock traded down 7.7% to $381.49 immediately after reporting.
Comfort Systems didn’t show it’s best hand this quarter, but does that create an opportunity to buy the stock right now?The latest quarter does matter, but not nearly as much as longer-term fundamentals and valuation, when deciding if the stock is a buy. We cover that in our actionable full research report which you can read here, it’s free.