Comfort Systems USA: Feel the warmth

Paul Rolfes | Sep 02, 2008 6:20am EDT | Comment

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Investors might become overheated when they stumble across the five-year stock performance of Comfort Systems USA (NYSE:FIX).

Comfort Systems has risen some 300% in the past five years, but a somewhat cooler 12.5% over the last three months; 17.3% year-to-date. Considering its business line, the weak American economy and price run-up, is it too late to feel the warmth?

The 91-year-old Houston company sells commercial heating, ventilation and air conditioning systems, along with building-automation controls.

Comfort Systems has 74 local operations in 59 cities, primarily east of the Mississippi and in Puerto Rico. Its local presence is a little sparse in the western half of the United States, but it has been aggressively buying companies to expand. One of its most-recognized units is Atlas Comfort Systems, a 60-year-old mechanical contractor that recently has been an underperformer.

Comfort Systems markets itself as a single source in what remains a fragmented industry, filling in the gaps in its nationwide network through acquisitions to take on its HVAC competitors, which are mostly privately held.

Following release of upbeat second-quarter results, analysts following Comfort Systems retained a fairly positive outlook, with two of the six surveyed by Thomson Reuters ranking the stock a “buy,” and the other two at “hold.” Stephens Inc.’s Matt Duncan did cut his rating to “equal weight” from “overweight” on fears that the residential construction malaise will take a firmer hold over commercial construction.

Over the past year, Comfort Systems stock has traded as high as $15.54 last Oct. 12, and as low as $9.34 on Jan. 22. Shares are testing that high, and closed Friday at $15.24. The median price target of analysts surveyed by Thomson Reuters is $17; it hasn’t approached $20 this decade.

For the three months ended June 30, Comfort Systems beat analysts’ expectations, as net income climbed 44% and revenue increased 27%. Order backlog shrank slightly to $780.2 million on a planned downsizing in its Atlas subsidiary.

In addition to a strong quarter, Comfort Systems announced Aug. 18 that it was boosting its stock-repurchase plan by 775,000 shares, possibly a factor in the 12% price rise since closing Aug. 17 at $13.29.

On an Aug. 1 conference call, Chairman and CEO Bill Murdy did not discount the challenges of a weak economy, but said Comfort Systems remains “positive” in its outlook for the second half of 2008 and into 2009, noting its “continuing ability to get additional new construction, retrofit work and service opportunities — some of which, by the way, is energy-efficiency driven … .”

KeyBanc Capital Markets analyst Tahira Afzal, who has the stock at “hold,” told clients that she views Comfort Systems’ “strong balance sheet as a source of stability,” predicting that the company will continue to make niche acquisitions and buy stock.

On Aug. 4, SMH Capital analyst David Yuschak raised his price target to $19 from $18 while maintaining a “buy” rating.

For those who can stand the heat, Comfort Systems could deliver cool returns.