When investors think about monster stocks that went stratospheric over the past decade, companies like Nvidia (NASDAQ:NVDA | NVDA Price Prediction) quickly come to mind.
Yet there is one company most investors have likely never heard of that is flying under the radar and achieved a 23-fold return over the last 10 year. This means a $1,000 investment in 2015 would be worth $23,370 today and there is good reason to think it can turn it into almost $50,000 in half the time. Even better, it is trading at a 28% discount.
Despite the tremendous gains its stock already booked, many investors are completely unaware of what it does or that it even exists. Yet it is poised for explosive growth over the next few years and beyond that should catapult it even higher.
When growth-by-acquisition works
Comfort Systems USA provides mechanical and electrical contracting services in facility construction
Comfort Systems USA (NYSE:FIX) seems like a Peter Lynch-type company. It provides mechanical and electrical contracting services for commercial, industrial, and institutional markets, the sort of mundane business the former Magellan Fund money manager favored.
It specializes in HVAC systems and electrical construction and engineering with revenue nearly quadrupling over the past decade. Much of that is the result of an aggressive merger and acquisition strategy as it seeks to roll up a fragmented industry under its large and growing umbrella. Over just the first nine months of 2024, Comfort Systems made three acquisitions.
While companies pursuing a growth-by-acquisition strategy can often run into problems as integrating new companies is not easy, Comfort Systems typically acquires smaller operations, which makes the process run smoother. It is the large, transformational acquisitions where companies run into problems and Comfort Systems has proven itself adept at choosing smart targets.
Despite the numerous purchases, FIX has only $62 million in long-term debt against $342 million in cash and equivalents on its balance sheet. It suggests Comfort systems can take on even more debt to further its growth ambitions.
A solid performance
Comfort Systems derives three quarters of its $4.1 billion in year-to-date revenue from its mechanical segment. Segment sales grew 40% in the third quarter while electrical segment revenue was up 8% year-over-year. Earnings grew 70% to $2.69 per share.
Although it was a strong quarter, Wall Street had been looking for more. Comfort System beat earnings estimates, but fell just short on revenue and backlog. Investors shrugged it off and sent FIX stock higher, but the DeepSeek news about a leaner, more efficient, and cheaper AI model sent shares careening lower.
That may seem surprising for a mechanical and electrical contracting company, but data centers have become a critical component of its business. Technology customers now account for 34% of revenue, up from 22% just one year ago.
Comfort Systems builds modular cooling units used in data centers, which consume enormous amounts of power due to AI.
Data center growth remains full-speed ahead
Data centers are an increasingly important component of Comfort Systems USA’s growth trajectory
According to the National Telecommunications and Information Administration, there are approximately 5,000 data centers operating in the U.S. and their number is projected to increase by 9% annually through 2030.
Management forecasts robust data center growth as modular designs become commonplace. Modular data centers are built from prefabricated modules that are assembled on-site and can be used to build a new facility or to add to or retrofit an existing facility.
Because the market seems to have overreacted to the DeepSeek announcement, primarily because its AI model may not be as revolutionary as it originally appeared, there should be little let up in data center construction. It will be that business in particular that lights a fire under Comfort Systems growth over the next few years.
Yet there are still risks to Comfort Systems. For example, liquid cooling is a fast-growing alternative to more traditional cooling systems that larger, better-financed rivals like Vertiv (NYSE:VRT) and Eaton (NYSE:ETN) are specializing in.
Comfort Systems is well-positioned to benefit from the trend, but it is a much smaller player in the space.
Key takeaway
Yet FIX stock remains attractively valued. Shares go for 23 times projected earnings, which Wall Street estimates will grow at a compounded annual rate of 30% for the next five years. That’s better than the 24% earnings expansion it enjoyed over the past five years.
At just twice sales and less than 20 times the free cash flow it produces, investors should view the big haircut Comfort Systems received as an opportunity to buy in for its next leg of growth higher. FIX stock might not be trading at its cheapest valuations after a decade of torrid growth, but there is still tremendous growth ahead.
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