Comfort Systems' Earnings Surge Masks Valuation and Sustainability Concerns

What happened

Comfort Systems reported blowout earnings for the fifth consecutive quarter, driven by surging data center demand that doubled its order backlog in 2025. This aligns with the $9.38 billion backlog noted in filings, where management expects 65% to 75% conversion over the next 12 months. However, Q3 2025's 24.8% gross margin included one-time benefits like $15.5 million from a customer bankruptcy and catch-up accounting adjustments. At a P/E of 57.7x and EV/EBITDA of 58.6x, the stock prices in peak-cycle performance despite risks of backlog cancellations and margin reversion. The market's AI proxy narrative overlooks these cyclical and accounting-sensitive drivers, making the rally vulnerable to shifts in tech sector capex.

Implication

The earnings report reinforces FIX's exposure to data center demand but does not justify its premium valuation given the cyclical nature of the business. Backlog growth is positive but carries cancellation risks and limited visibility beyond six to twelve months, as highlighted in filings. Margin sustainability is questionable due to reliance on favorable developments and catch-up accounting, which could reverse in future quarters. The stock's crowded positioning as an AI beneficiary increases its sensitivity to any negative news on conversion rates or tech sector slowdowns. A prudent strategy is to monitor the next quarterly filings for RPO conversion consistency and margin trends, aligning with the DeepValue report's 'WAIT' rating.

Thesis delta

The earnings news confirms operational strength but does not change the fundamental thesis that FIX is overvalued and reliant on unsustainable margin drivers. Investors should still wait for a pullback toward $1,100 or two clean quarters of RPO conversion and margin evidence before considering entry. No shift is warranted until these conditions are met, as the risks of multiple compression and cycle downturn remain elevated.