Comfort Systems USA (FIX): Solid FCF; Roll-up strategy; Under the tenure of the current CEO market cap increased by 15X; “Pure Service” is a small hidden gem

• M.Cap: $6 billion | Debt: $4.4 billion | Cash: $49 million | EV: $6.17 billion
• EV/Revenue: 1.39X
• Volume: 168,110
• Major shareholders: Blackrock - 16.82% | Vanguard - 11.73% | Capital World Investors - 6.15% | State Street Corp. - 3.42% | Dimensional Fund - 3.35% | Invesco - 2.29% | Alliancebernstein - 2.26%
• Screen: Random.

I. Basics

The company provides mechanical and electrical contracting services.

Mechanical segment (77% of total revenue)

• Services include heating, ventilation and air conditioning ("HVAC"), plumbing, piping and controls, as well as off-site construction, monitoring and fire protection.

Electrical segment (23% of total revenue)

• Services include installation and servicing of electrical systems. The company build, install, maintain, repair and replace mechanical, electrical and plumbing systems throughout its 42 operating units with 169 locations in 128 cities throughout the United States.

 Revenue split-up

• New construction: 49%
• Renovation/expansion/maintenance: 51%

 Market size

• As per the company's estimate, the commercial, industrial, and institutional mechanical and electrical contracting generates annual revenue in the United States of approximately $350 billion.

II. Research

1. Largest specialty contractor

• The company is the 9th largest specialty contractor.
• https://www.enr.com/toplists/2021-Top-600-Specialty-Contractors-Preview

 2. Solid financials

• Revenue grew from $1.1 billion in FY 2010 to $4.4 billion in LTM March 2023.
• During the same period, operating income increased by 14X, from $20 million to $289 million in LTM March 2023.

 3. Solid FCF

 4. Roll-up strategy

• For the past 12 years, the company has spent over $1.3 billion on acquisitions.

5. Stellar CEO

Brian E. Lane, CEO since December 2011

• 15X growth: Under the tenure of Mr. Lane, the company's market cap increased from $400 million in December 2011 to the current market cap of $5.8 billion.
• Ownership: Negligible

6. Pure Service: high margin and growing

• "Pure service" includes maintenance and repair.
• Pure service enjoys significantly higher gross margins
• The company has made substantial investments to expand its service and maintenance revenue. Growing its sales force and building service capabilities over the past several years is a major contributor for the improved financial performance. 

• In absolute value, the 'pure service' segment revenue is constantly growing
• Note: You can find "pure service" data from conference calls.

 OUR COMMENTS

The company's prudent roll-up strategy involves using debt, but it successfully generates free cash flow, which is employed to repay the incurred debt.

Since January 2019, the company has acquired businesses totaling $970 million, while successfully maintaining stable debt levels and even reducing them to a 4-year low.

Debt

 We're still willing to borrow and we'll be paying down the little bit of debt we have pretty quickly. But you know what, we don't – we're not going to force acquisitions, we still think overtime we can average the growth that we have in the pass through acquisitions. – Q4 2015

Even with our acquisition expenditures, we were able to reduce our debt to less than one turn of trailing 12-month EBITDA. – Q4 2020

 When Mr. Lane took charge as CEO, the company generated $20million. He grew the business steadily to become a business that generates $300 million of FCF.

Now, with $300 million of FCF, he can acquire larger businesses and continue to grow the business at a much higher rate.

Overall-

The crux of the research is tied to finding the length of the runway, i.e., how big the market is and how long the CEO can continue to acquire companies.

The thesis does not revolve around short-term price corrections or any speculative "catalyst" that could unlock the stock price.

The stock has the capacity for substantial growth, with the momentum of the roll-up strategy capable of snowballing into a much larger organization. This stock is strictly for long-term investment.

FURTHER RESEARCH

TOP 100 CONTRACTORS

https://www.phcppros.com/ext/resources/documents/p/h/c/0/phc04_2012.pdf

Page 28

https://www.enr.com/toplists/2021-Top-600-Specialty-Contractors-Preview

CAPITAL RETURNED

($ in thousands)

 CONSTRUCTION BACKLOG

($ in millions)