Guess what is the top performing stock in the S&P 500 over the past five years. It’s not Nvidia (NASDAQ: NVDA) with a 68% annualized total return, and it’s not Super Micro Computer (NASDAQ: SMCI) with a 62% annualized return. It’s not even a technology company.
It’s a company that provides mechanical and electrical services. The mechanical segment includes heating, ventilation and air conditioning (HVAC) and off-site construction. The electrical segment includes installation and servicing of electrical systems.
The company is Comfort Systems USA (NYSE: FIX). It has a whopping five-year annualized return of 81% and a market capitalization of $35 billion. It’s known for its operational excellence and innovation.
Much of the company’s recent growth has come from work on data centers, which have enormous cooling and electrical needs among others. Comfort doesn’t list its customers, but all the major data-center builder/operators are likely candidates.
Importance of tech sector
In the nine months through Sept. 30, 42% of its revenue came from the technology sector, rising sharply from 32% a year earlier. “While … we continue to see good demand for manufacturing, in many cases, data-center opportunities are more compelling,” Chief Operating Officer Trent McKenna, said in the company’s Oct. 24 earnings call.
Tech accounts for the majority of Comfort’s new bookings, but other sectors are contributing too. The pharmaceutical industry constituted its biggest single booking in the last two quarters. “There’s a lot of work coming” in the pharma sector, said CFO William George. That largely consists of drug factories planned on the east coast.
The trend toward onshoring, where U.S. companies bring their manufacturing operations back home, benefits Comfort. Construction accounted for 86% of its revenue in the third quarter, with projects for new buildings representing 61 percentage points of the total.
Meanwhile, Comfort’s specialization in modular (off-site) construction provides a significant competitive edge. That’s a result of faster project completion, better quality control, improved labor efficiency, higher margins, and appeal to high-growth sectors. The company can handle HVAC and electrical systems like Legos off-site.
Record backlog, strong earnings
It’s no wonder that Comfort enjoyed a record order backlog of $9.38 billion as of Sept. 30. And it sees the trend continuing. “The pipeline is still robust, matching quarter three,” said CEO Brian Lane. “There’s still more opportunities than probably can be handled in the market at the moment. So we’ve seen no let up at all in the opportunities.”
The company scored a 35% jump in revenue during the third quarter and a 99% surge in net income from a year earlier. The gross profit margin rose to 24.8% from 21.1%.
The company has built a cash hoard of $861 million. That’s not such a bad thing, notes CFO George. “But we haven’t changed our capital allocation thinking since 2007,” he said. “We will deploy most of our cash doing acquisitions. We will continually buy back our shares …, and we get aggressive on that when we feel like the stock has dipped relative to our prospects.”
So everything’s looking bright for Comfort. Its forward price-earnings ratio stands at 33.3, far above the S&P 500’s ratio of 22.4.
Comments