Monday, October 2, 2017

A current AIM Program Small Cap Equity Holding: Comfort Systems (FIX) by: Max Mattappillil. "A cool leader in HVAC installation and repair"

Comfort Systems (FIX, $34.75): “Systematic Comfort, Despite Uncomfortable Outlook on Construction”
By: Max Mattappillil, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.


Comfort Systems (NYSE:FIX) Engages in the provision of business solutions addressing the workplace. It is involved in comprehensive heating, ventilation, and air conditional installation as well as maintenance, repair, and replacement services within the mechanical services industry.

• Significant increase in projects in process from the end of 2016 coupled with a slight decreased in average contract price.

• Weak outlook on construction industry for the remainder of 2017 through 2018.

• Management is resilient on 2017 revenue growth despite economic conditions.

Key points: Comfort Systems has rapidly increased their projects in process from 3830 at the end of 2016 to 5006 at 2Q17, a 30.7% change. However, average contract cost decreased 8.3% from $516,000 to $473,000. This indicates that Comfort Systems has placed more emphasis on shorter-term projects as their longer term projects tend to be more costly, yet profitability continues to grow.

An economic outlook on the construction industry may provide headwind towards company growth. Commercial and industrial spending for first two quarters has decreased by more than 3% compared to 2016. According to the American Institute of Architects, industrial construction is projected to decline at 7% and institutional construction is projected to grow 2.2% less than its initial projection from the beginning of 2017.

Despite these conditions, management is still confident in their ability to remain profitable throughout 2017. Project bookings in their Virginia, Colorado, and Arizona locations has boosted same-store backlog in addition to a recent acquisition near Tampa, Florida which increased operating locations to 36. Comfort Systems plans to focus more on execution and efficient project performance for the remainder of 2017, thereby investing in a greater number of service and small projects.

What has the stock done lately?

FIX’s share price fell 11.1% near the end July and continued to fall slowly till the middle of August. Although this may seem like a large decrease in price, the share price has been on a steady climb since then. Management’s new focus on execution and project performance may be the necessary driver to boost FIX close to its 52 week high before the end of the year.

Past Year Performance: Comfort Systems has increased 19.6% from $29.05 to $34.75 over the past twelve months and remains relatively close to its 52 week high of $39.60. FIX grew rapidly in 2016 from October 25th to December 16th and received an astronomical boost in its share price of 18.2% on February 24th. In addition to FIX’s positive outlook for 2017, earnings will be reported on November 2nd, so it will be interesting to see if management has indeed been able to implement their focus on improved execution as reported in their latest 10-Q.

Source: FactSet

My Takeaway

Weakening growth in the construction industry poses a challenge for Comfort Systems’ ability to finish 2017 with a strong presence. It is no easy task to increase profitability when a major driver of the business is tied to the growth of the construction industry. However, FIX has historically shown that it can dynamically adapt to a changing environment as represented by their steady revenue growth since 2012. Coupled with a recent acquisition as well as a boost in new projects, FIX may be able to withstand an economic headwind for the remainder of 2017 and continue to be a leader in HVAC installation and repair.

Source: FactSet