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.
Summary
•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
