Comfort Systems Margin Growth Reinforces Execution, Valuation Remains Stretched

What happened

Comfort Systems USA has seen gross margin expand by 340 basis points to 23.6% for the first nine months of 2025, with a 370 bps increase in the third quarter, as highlighted in a recent article. This improvement is consistent with the company's broader strong performance, including rapid revenue growth, a surging backlog to $9.38 billion, and record free cash flow detailed in the DeepValue report. However, the stock has more than doubled in the past year and trades at approximately 41x TTM earnings, reflecting aggressive market expectations. The business model involves fixed-price contracting in a cyclical industry, exposing margins to risks like cost overruns and economic downturns. Despite positive operational trends, the high valuation offers limited downside protection, maintaining the cautious stance from the report.

Implication

Investors should recognize that margin growth is positive but already embedded in the high valuation, with the stock trading at a premium to conservative intrinsic estimates. The company's backlog provides near-term revenue visibility, yet cancellations or project losses could swiftly erode gains, especially in a bid-driven market. High multiples amplify the impact of any earnings disappointment, making the stock vulnerable to significant corrections if margins revert or growth slows. For existing holders, this news reinforces a hold strategy, but new capital should await a material pullback to improve the margin of safety. Continuous monitoring of backlog conversion, margin sustainability, and macro indicators is crucial, as the current pricing assumes sustained peak performance.

Thesis delta

The article confirms gross margin expansion in 2025, aligning with the DeepValue report's view of strong execution but does not shift the core investment thesis. The thesis remains unchanged: business quality is high with secular tailwinds, but valuation is rich at over 40x P/E, limiting the margin of safety in a cyclical industry. Investors should maintain a wait-and-see approach, looking for better entry points or evidence of durable margin improvements before considering a buy.