How does an air-conditioning company become one of the hottest stocks? When it's part of the AI data center boom. That's the story of Comfort Systems USA, the IBD Stock Of The Day.
Comfort Systems stock cleared a buy point Wednesday as part of a big rally in artificial intelligence stocks. Oracle gapped up 40% Wednesday on a surging backlog, signaling strong demand for AI chips, data centers and related infrastructure.
FIX stock is up more than 75% year to date.
Comfort Systems provides more than just air conditioning. It owns 45 companies across the nation that build and service mechanical, electrical and plumbing systems for buildings.
Much like Oracle, Comfort Systems' backlog is swelling thanks largely to demand for data centers, which require massive cooling.
In its most recent earnings report, Comfort Systems reported a backlog of $8.124 billion, up 35% from $5.994 billion last year, $5.517 billion in 2023, and $4.064 billion in 2022. The backlog was no higher than $2 billion from 2010 to 2020, and it's no coincidence that it's been ballooning since AI apps led to more construction of data centers.
Houston-based Comfort Systems said in its July 24 earnings report that technology projects represented 40% of revenue in Q2, up substantially from 31% in the prior year due to data center construction.
Data Centers Drive Growth
"I'll take any job you have as long as it rhymes with data center," Chief Financial Officer William George joked with analysts in the earnings call.
Comfort Systems' earnings growth accelerated from 49% to 60%, 67% and 75% over the past four quarters, according to IBD MarketSurge. Sales increased 32%, 38%, 19% and 20% and topped the $2 billion mark for the first time in Q2.
Those numbers have made Comfort Systems the No. 1 stock in IBD's air conditioning and heating products industry group. Its Composite Rating of 98 is the highest in the group, and most of its other IBD Ratings also are industry-best.
CEO Brian Lane said gross margin grew to 23.5% in the most recent quarter amid strong pricing.
Analysts' consensus earnings estimate for the full year is $23.18 a share on a non-GAAP basis, up 59%. Sales are expected to climb 17% to $8.215 billion, according to FactSet.
Stock Analysis
Comfort Systems stock rallied 6% to 752.10, hitting a new high and clearing a pattern in which the stock made narrow weekly price moves and closing prices over six consecutive weeks. The buy point is 733.25, making the stock actionable. The relative strength line is at new highs, also a bullish sign.
The stock soared more than 22% on July 25 after a solid earnings report. Although the stock went sideways afterward, the tight price action indicated that institutional investors were confident to hold on for higher gains.
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The data center stock has a 21-day average true range (ATR) of 3.59%. The average true range is a metric available on IBD's MarketSurge that gauges the characteristic breadth of a stock's behavior. Stocks with a high ATR tend to make large price moves that can trigger sell rules. Stocks with lower ATRs tend to make more incremental moves.
With the S&P 500 and Nasdaq now in a power trend, investors can buy stocks with ATRs up to 8%, though they should be wary of being too concentrated in high-octane names.
