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It
seems like extreme weather conditions are more and more
prevalent.
Some call it global warming /climate change
or perhaps it’s simply a growing population that is more plugged in
than ever
and reporting everything they see.
While
global climate change in debatable, population growth and urban sprawl
is not.
The
increasing population and global distribution of wealth through
increased trade
and e-commerce is helping to fuel both the residential and commercial
housing markets
as well as construction and expansion of industrial and commercial
structures
of all times, not to mention the companies that maintain those
buildings.
Today’s
Bull of the Day is a unique stock that is a derivative play on the
housing /
economic recovery and the need for more creature comforts in the home
and
workplace (or at the very least basic heating and air conditioning).
No
Place Like Home (and work)
Comfort Systems USA FIX is more than your local
HVAC Company; they are a nationally integrated heating, ventilation and
cooling
(HVAC) business that offers solutions for homeowners as well as
commercial applications. In fact, residential income is just
a small
part of their commerce.
Comfort Systems
estimates that there are over
35,000 different companies that make up the highly fragmented HVAC
field here
in the U.S.. Their goal is to
consolidate and economize this space and offer complete, quality
solutions for
consumers and local governments.
Essentially they have
partnered with the best
and brightest companies around the country and are continuously in the
process
of building a seamless network between them to better serve the public.
Past
Results
The market of their customers are comprised
of manufacturers/distributors (25%), healthcare (15%) and education
(20%), with
government and office buildings adding another 20% to their revenue.
FIX’s revenues were
actually down slightly
versus the same quarter last year, but profits rose 20%.
Shares are up roughly 40% in the last year.
Over the past five
years, gross margin peaked
at 20.0% and averaged 17.6%. Operating margin peaked at 6.0% and
averaged 3.3%.
Net margin peaked at 3.8% and averaged 1.2%.
TTM gross margin is
16.3%, 130 basis points
worse than the five-year average. TTM operating margin is 2.2%, 110
basis
points worse than the five-year average. TTM net margin is 1.3%, 10
basis
points better than the five-year average.
Shares currently
trade at 27 times forward
earnings and carry a PEG ratio of 4, which are both on the high side
and no
doubt carry more risk than your average S&P 500
stock.
Comfort Systems also trades VERY light
volume, which is another risk to consider before investing.
While this isn’t the
best looking fundamental
picture out there, I find their business model compelling enough to
mention and
I know that maintenance contracts on aging HVAC systems carry big
margin, which
could help FIX. All the new construction
over the last decade placed many new systems on in service, and while
FIX
captured some of this, the bigger money will be in maintaining these
systems
that are coming up in age.
Companies that are
needing to stabilize costs
in this weak economic recovery may opt for HVAC contracts to maintain
their systems,
adding to revs for FIX.
Earnings
Heating Up?
With record high temperatures here in the
U.S. and companies’ earnings stable, HVAC expenditures should be
getting a
boost.
To that end, there
have been a good number of
analysts that have moved their estimates higher over the last 60 days
and just
a couple that went down.
Earnings magnitude is
moving in the right
direction with estimates for current quarter as well as FY 2013 and
FY2104
moving higher in that same time frame (Q3 estimates were flat to
slightly
down).
FIX has surprised
analysts 3 of the last 4 earnings
reports, exceeding analysts’ consensus expectations by an average of
214%.
While there is no
doubt this is a higher risk
stock, it’s worth exploring deeper for opportunity. Use
caution with the low volume as even
smaller trades can move the market.
If you are looking
for something a little
more stable in the HVAC space, check out Watsco WSO (Zacks Rank #2),
Inc., they
are one of the largest distributors of air conditioning and heating
equipment
and related parts and supplies in the United States. The company also
sells
products used in the refrigeration industry. Such products include
condensing
units, compressors, evaporators, valves, walk-in coolers and ice
machines for
industrial and commercial applications.
Jared
A Levy is one of the most highly sought after traders in the world and
a former
member of three major stock exchanges. That is why you will frequently
see him
appear on Fox Business, CNBC and Bloomberg providing his timely
insights to
other investors. He has written and published two tomes, “Your
Options Handbook” and “The
Bloomberg Visual Guide to Options”. You can
discover more of his
insights and recommendations through his two portfolio recommendation
services:
Zacks Whisper
Trader– Learn to
buy stocks likely to have robust earnings BEFORE they report.
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