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HVAC and electrical contractor Comfort Systems USA (NYSE:FIX) beat analysts' expectations in Q2 CY2024, with revenue up 39.6% year on year to $1.81 billion. It made a GAAP profit of $3.74 per share, improving from its profit of $1.93 per share in the same quarter last year.
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Comfort Systems (FIX) Q2 CY2024 Highlights:
- Revenue: $1.81 billion vs analyst estimates of $1.69 billion (6.9% beat)
- Adj EBITDA: $222.7 million vs analyst estimates of $182.5 million (22.0% beat)
- EPS: $3.74 vs analyst estimates of $3.20 (17.1% beat)
- “Backlog also remains at extremely high levels despite a roughly 30% surge in same-store revenue. Same-store backlog is 25% above last year, demand continues at unprecedented levels and our job pipelines are robust. Considering these factors, we remain optimistic that our strong results will continue in the second half of 2024 and into 2025.”
- Gross Margin (GAAP): 20.1%, up from 17.6% in the same quarter last year
- Free Cash Flow of $167.3 million, up 36.4% from the previous quarter
- Backlog: $5.77 billion at quarter end, up 37.9% year on year
- Market Capitalization: $10.68 billion
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 ServicesConstruction 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 GrowthA company’s long-term performance can indicate its business quality. Any business can put up a good quarter or two, but many enduring ones tend to grow for years. Luckily, Comfort Systems's sales grew at an incredible 23% compounded annual growth rate over the last five years. This is a great starting point for our analysis because it shows Comfort Systems's offerings resonate with customers.
Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Comfort Systems's annualized revenue growth of 30.1% over the last two years is above its five-year trend, suggesting its demand was strong and recently accelerated.
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 $5.77 billion in the latest quarter and averaged 48.1% 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 reported wonderful year-on-year revenue growth of 39.6%, and its $1.81 billion of revenue exceeded Wall Street's estimates by 6.9%. Looking ahead, Wall Street expects sales to grow 15.1% over the next 12 months, a deceleration from this quarter.
Operating Margin
Comfort Systems was profitable over the last five years but held back by its large expense base. It demonstrated mediocre profitability for an industrials business, producing an average operating margin of 7.3%. 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 percentage points over the last five years, as its sales growth gave it operating leverage
In Q2, Comfort Systems generated an operating profit margin of 10.2%, up 3.1 percentage points year on year. This increase was encouraging, and since the company's operating margin rose more than its gross margin, we can infer it was recently more efficient with expenses such as sales, marketing, R&D, and administrative overhead.
EPSWe track the long-term growth in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company's growth was profitable.
Comfort Systems's EPS grew at an astounding 40.3% compounded annual growth rate over the last five years, higher than its 23% 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 percentage points over the last five years. On top of that, its share count shrank by 3.7%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.
Like with revenue, we also analyze EPS over a shorter period to see if we are missing a change in the business. For Comfort Systems, its two-year annual EPS growth of 42.4% was higher than its five-year trend. We love it when earnings growth accelerates, especially when it accelerates off an already high base.
In Q2, Comfort Systems reported EPS at $3.74, up from $1.93 in the same quarter last year. This print easily cleared analysts' estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Comfort Systems to grow its earnings. Analysts are projecting its EPS of $11.91 in the last year to climb by 8.1% to $12.87.
Key Takeaways from Comfort Systems's Q2 Results We were impressed by how significantly Comfort Systems blew past analysts' revenue and adjusted EBITDA expectations this quarter. We were also excited its EPS outperformed Wall Street's estimates. On the other hand, its backlog missed. However, the company made optimistic statements about the demand environment, saying that "demand continues at unprecedented levels and our job pipelines are robust". Zooming out, we think this was a solid quarter, showing the company is staying on track. The stock traded up 1.9% to $298 immediately following the results.
