TIVP094 (Video): Comfort Systems (FIX): The Five-Bagger We Passed OnComfort Systems w/ Kyle Grieve & Shawn O'Malley

25:38But nothing here seems super, super splashy to me as they've deployed about$319 million over the last year over a handful of kind of these smaller acquisitions. Now, Sean, you mentioned in your episodes that they made an average of about one and a half to two deals per year when you first pitch the business. But in 2025, they really, really stepped up their acquisition pace to around four. And two of them were made after your pitch in Fay and Ziftra and Meisner Electronic. So what are your thoughts on these acquisitions? Yeah, I think the great thing about Comfort Systems is that they make these acquisitions from a position of strength.

26:08They're very disciplined on price. And in this case, like most of their deals, these acquisitions were funded almost entirely from cash with little need for debt. And so I think both of them look like pretty good deals, but the Fine and Zylstra deal in particular stands out. And so the purchase price is about 10 times operating profits or 0.7 times revenue. So that is a pretty reasonable price. And I'd say FZ is also strategic for Comfort Systems in the sense that it adds to Comfort's portfolio of electrical contractors, which we've mentioned as being this major growth area for the company. So if anything, I think it signals just how strong demand has continued to be in this area where FZ brings more contractors supporting data center buildouts and also more exposure to the healthcare industry as well, which I think is generally a good area for comfort to try and diversify into, right?

27:02hospitals have huge HVAC needs and they don't really go out of business or have downturns because people are always sick. So they make for great customers from Comfort Systems perspective as an HVAC contractor and servicer. So yeah, I like it mostly because Comfort is really sticking to what they do best and what's been working. And also they're not venturing well beyond their circle of competency or making massive, unprecedented deals. Yeah, I really like the deals as well. They're sticking to the wheelhouse and not trying to go out and, you know, completely reinvent the wheel or go into some sort of adjacent vertical that they don't really have any experience in.

27:40So I really commend them on that. One thing I found interesting about Comfort Systems was the increase in same store sales growth. So when you look at most serial acquirers, they tend to have organic growth rates kind of in the low single digits. But looking at the numbers for fiscal year 2025, they had about 3.4 % in contributions from new acquisitions and an outstanding 26 % growth in same store sales driven by demand in both technology and data center sectors. But this is a double-edged sword. With historical same store sales growth being in kind of that 3 % to 4 % range, I would say that current growth rates seem very highly probable to regress to their mean.

28:14And again, depending on whether it becomes clear that we've been in an AI spending bubble, you could see more than just a reversion. You might see a revenue decline for several years into the future. But I will say, you know, that doesn't look imminent. If we look at the mix of acquired versus same store growth on the backlog, this quarter actually increased by$1.6 billion and 1.4 billion of that was in same store growth. So Sean, do you have any thoughts on when same store sales growth will normalize? Well, I think this is the big question. And for context for listeners, right, when we say same store sales growth, we're just referring to the existing businesses they already own and their growth versus any recent acquisitions that they've made.

28:53When we think about whether all this AI CapEx spending comes to fruition, and if that is true, then Comfort Systems remains uniquely positioned to capitalize on that spending. We can speak more about that, but that would effectively mean that the stocks run is not entirely unjustified. And if AI is really everything that technologists are promising and more, then comfort systems could very well be in the midst of a new growth paradigm for their business that really nobody saw coming at the scale five years ago. And you could say that maybe we started to get some ideas of how much data center spending there would be when we saw how popular chat GPT became at first.

29:34But really, a lot of that spending has started to become more visible just in the last 12, maybe 24 months. And then on the other hand, though, if we're to have a stock market crash, a bunch of AI startups go under, maybe lenders bail on financing data center build out, maybe Anthropics IPO doesn't go very well this fall. I think that's when it's planned for. Well, then much of Comfort Systems' backlog would evaporate. And we mentioned that earlier. And then the jump in revenue and earnings that they've seen would look like a flash in the pan. So that's really what I struggle here assessing with Comfort Systems.

30:11Well, let's talk a little bit more here about how AI spending has really translated into this just massive boon for Comfort's business. So if you look over the last year at all of Comfort Systems' customer categories, there's one that really stands out very obviously over the other, and that is the industrial segment. So this segment has historically been the largest, but the growth over the last year has been near parabolic at 74%. And this segment alone accounts for nearly three quarters of Comfort Systems' revenue in the first half of 2026. Now, the reason that I highlighted the industrial segment is that technology is included in this segment.

30:43And since data centers and chip manufacturing is a big reason that Comfort Systems has had this meteoric rise upwards, I definitely think it's very important to highlight it here. Just to give you an idea of how large this part of the business is, 56 % of Comfort Systems' year-to-date revenue was just from technology, up from just 30 % in 2024. And they also just added another electrical business, Hunt Electric, which could add a decent amount of industrial and technology-based business as well. You hear a lot of people talking about betting on electrification as an investing theme, or maybe more so a few years ago.

31:15And the thing is, the energy grid very much does need to expand because we're going to have more electric cars in the future and more battery powered things. And so many people have bet on copper to increase in price. And you need more copper in an electrified world without getting into the physics of all of it. And that's been a crowded trade because it is fairly obvious, right? It's just first order thinking. More electricity demand equals more demand for copper to conduct that electricity. You need a lot of copper wires. And for decades, energy consumption in this country, though, has been pretty flat.

31:49But in recent years, we are seeing that change. And per capita energy consumption is finally starting to grow again, thanks to AI and data centers. And so Comfort Systems is more of a second order thinking bet on this. And that's an idea that comes from Howard Marks, who talks a lot about that and investing. And so thinking about the second derivative effects, essentially, and so increased electricity demand leads to more copper demand, but less obviously, it also leads to greater demand for HVAC technicians. And really, I have no excuses here. I knew that data centers and EVs were dramatically increasing demand for electricity and therefore electrical engineering services as well.

32:31And that's because my wife works in renewable energy. So I saw through her work how energy demand had just been exploding. And yet I didn't connect the dots enough to not underestimate how much this segment could continue to grow and benefit Comfort Systems after it had already experienced massive growth. Yeah. And I'm a huge admirer and fan of Howard Marks and second order thinking. And I think kind of the key to second order thinking as well is that you need to have a lot of depth and knowledge in that area to even actually think in the second order, right? Because like you just mentioned here, the writing's on the wall for the need for more and more HVAC technicians.

33:09But, you know, if you're not thinking about HVAC technicians or how they're going to be utilized over the next few years, well, then chances are you just won't even think about it. So it kind of just kind of goes to a circle of competence thing. But I can really see how you've already thought a lot about the optimism that was already baked into the business when you first looked at it. You know, when a business's CEO says they're optimistic about the future, it really doesn't mean very much simply because in reality, what CEO out there would admit to shareholders that they're pessimistic about the future, you know, maybe Buffett would do that.

33:36But most CEOs have to watch their words very carefully because they don't want to upset the market. But on the other side of the thing, it kind of dulls you as well to how CEOs who are being bullish because you feel like you kind of have to take what they're going to say with a grain of salt. Not to say that comfort systems management is untrustworthy by any means, but just a general view of how I tend to look at management. If you've owned businesses for multiple years, you tend to get kind of accustomed to how they speak and how good you become at reading maybe between the lines a little bit.

34:03This is when you kind of get that really, really good edge that you can use because new investors or investors that are maybe just looking at the business for the first time, they just won't have the same feel for how the management speaks. And you know, if management regularly sandbags or if they're overly optimistic, these things take a lot of time to understand at a deeper level. And you kind of only really develop that feel once you own the business for a certain period of time. I would say Comfort Systems really does have a high class management team. I mean, the fact that they were so reserved about the opportunities ahead of them probably limited my own optimism and businesses that tend to conservatively underestimate their prospects are actually probably in a stronger position than the companies that have to sell investors on just how great their business model is.

34:47And it's one of those things where if you know you're good or in a good position, you know, the numbers will eventually show that. So you're happy to let the numbers do the talking for you. And that's definitely more of comfort systems style. And so I think in my initial thesis, I probably should have spent more time on the data center and chip manufacturing part of the business and thinking about just how impactful that could be. But now that we're revisiting it, we do have some more time to provide a fresh perspective on the topic. And so if we look at the company's latest presentation, management has discussed large project bookings in this segment in states like Texas, North Carolina, and Indiana.

35:27So the data center story is very much alive and well across the US. And I've even seen the boom in data centers firsthand living in Virginia, which is really currently the data center capital of the US. So again, it does show just how much something can be right in front of your face as an investor, and you can still miss it if you're anything like me. But Texas now looks like really the data center hub of the future. It's forecasted to overtake Virginia by 2030, with Texas reportedly using about a fifth of its energy capacity to support data centers today. So it's not a surprise that Comfort Systems is therefore focusing on Texas in particular as a growth avenue in the future.

36:09And then in terms of chip manufacturing, Texas already leads the US in chip exports. And there are billions of dollars of more government funding and private equity that are being invested in this industry in Texas. So it doesn't look like chip manufacturing is slowing down anytime soon. And that pairs closely with this AI super cycle more broadly. And so in other words, I think Texas is very important to the future of comfort systems business. And that means that any investors looking at comfort systems today, I think you would want to pay close attention to the local regulatory environment there and the sentiment around data centers, not just in the US, but in Texas in particular, because we've seen in many places data center construction and the impact on the energy grid is very much being protested.

36:59And I suspect it will become an increasingly controversial issue in the state to Texas, which could ripple across to affect comfort systems businesses. So I think this search for more favorable regulatory stances is what has led data center construction out of Virginia to Texas. But again, it's not guaranteed indefinitely that Texas will always be so friendly to new data center build outs. Yeah, these are all great points. And I think it really shows us that there are some real legs behind the tailwinds that comfort system has, but it might be a few years before things begin to level off. And to be honest, I think as we made very clear today, we just don't know when that's going to happen.

37:38So from what I was able to research, it's really tough to figure out what kind of correlations there are between data centers or chip manufacturing, as well as the Comfort Systems product offerings that they offer, obviously, in mechanical and electrical segments. It's quite obvious that there is some sort of correlation, but I think it's nearly impossible to determine exactly what that correlation is and how we would actually use that in a context that makes sense for an investing purpose. What we can tell from Comfort Systems disclosures is that they're willing to look out about a year or so.

38:07So their backlog disclosure represents revenue that's expected over the next six to 12 months, but it probably actually underestimates the real number because they also have some shorter term projects inside of the next, say, year that are not included in the backlog. And since the backlogs continue to swell, obviously that's a good signal that things are getting better. Right, and as we said, management is not crazy aggressive about the guidance that it tends to provide. But they did recently note that things are likely to continue going well for the remainder of 2026. And I definitely believe them when they say that.

38:37And so this doesn't tell us where the backlog will necessarily end up, but I do think it's a pretty good signal that it will be at worst sustained and at best could continue to increase significantly. Right, and since we own a few hyperscalers in the intrinsic value portfolio, I think we do have some insights into the coming AI build-out that Sean, you kind of already mentioned here. So, you know, for instance, one of our companies, Alphabet, guided its CapEx for 2026 to be in the range of about$200 billion. And management has actually stated that number is probably going to increase in 2027. Now, we really have no way of knowing whether Alphabet is even a customer of Comfort Systems.

39:11But if we use Alphabet and the hyperscalers as kind of proxies for data centers and chip spending, I think it's really obvious that spending is likely to continue to increase over the next few years. So I would say the chances are pretty good that Comfort Systems will continue to benefit from these trends. But again, as we keep coming back, it's just hard to know how long these trends are going to last. Well, it's funny you mentioned that because I was actually just reading earlier today about how the SEC has made it easier for data centers to now sell asset-backed securities to raise financing.

39:42So basically, the Securities and Exchange Commission has said that a major subset of data center securitizations don't need to have disclosures and investor protections baked in to what similar deals would typically require, such as risk retention, which is a requirement that companies issuing asset-backed securities retain some of the debt to better align their interests with investors. meaning you have to have some skin in the game. And so regulations are, in other words, are loosening up to allow for even more money to flow into data center construction. And to me, that feels like a sign of a bubble, but you've also got private market giants like Blackstone, Apollo, Brookfield, and even BlackRock promising to invest up to$500 billion into data center infrastructure alongside NVIDIA.

40:31And so these are mind boggling numbers. How does one even fathom$500 billion in spending. So even with everything we've seen in the last year, it's just hard for me to process that this spending is real and that all of it will manifest as currently planned. But thus far, my skeptical impulse on AI spending really could not have proven more wrong. So I would say take what I say with a grain of salt. Yeah, I mean, that's right. But to be honest, Sean. I mean, I've looked at quite a few bubbles in the past. And one of the more commonalities that you'll find in that is the ability of government or leaders or people with lots of capital to make the access to capital even easier to buy more of whatever the asset is, whether that's tulip bulbs or whatever.

41:17So the fact that the SEC is making it easier and easier to get debt, to buy things, to basically help with this data center and chip manufacturing rollout, I would say that's honestly pretty concerning. And it's something that I would pay very, very close attention to because the fact is where people can find cheap money, money is going to go into those sectors. And obviously the SEC and the US government knows that. So that's probably why they're doing this is that they know that they want to grow the sector. But the problem is we just don't really know if the sector is actually going to offer an attractive return.

41:50So the fact that they're doing that, like, again, I'm pretty concerned. Definitely well said. How about we shift here and discuss whether Comfort has any competitive advantages. And clearly Comfort Systems is riding a big tailwind that is lifting entire industries that the company is exposed to. And so in theory, that should attract more competition. And I do think that it inevitably will. But in the meantime, we've already discussed how the company's profit margins are very much trending up and to the right. And that implies that demand is growing fast enough to more than offset any new competitive pressures.

42:25And because profit margins have been expanding, we know that this is not a case where Comfort Systems is out there just trying to bid on any project they can find, even if it comes at a loss, just to pump up their revenue figures in the short term. And that is something you do sometimes see in poorly run real estate and contracting companies. And you can basically sign a bunch of projects that might make your revenue jump. And that might make some investors happier or unlock bonuses for executives. But if you pay too high of a price for those deals, the company actually becomes less profitable over time, even as revenue is increasing.

43:01And again, that's not what we're seeing here. And to make things even better, the electrical contracting business is very much tied to having more longer term contracts than some other forms of contracting services. So basically every incremental dollar they're earning in this electrical segment is arguably worth more than some of their other business segments because those cash flows are, on paper at least, contractually more likely to continue for longer. They're more locked in. Yeah, Sean. And I'll just comment there on your point about projects and bidding process. I have a business that I won't mention by name here, but it's involved in the housing construction industry.

43:39And they've unfortunately basically had to pivot somewhat to having to take on some of these lower margin projects just so that they can maintain their revenue numbers and not have this giant decline in revenue. And unfortunately, because of that, their margins have also come down. So this is a business that's, I would say, not even close to the same amount of quality as Comfort Systems. But it's an interesting opportunity for me. But, you know, the point being that once the dynamics of bidding change and it becomes harder and harder to actually find suppliers to do the bids, they can actually increase the price of their projects, which increases margins.

44:14So it's just kind of a roundabout way of saying, you know, when you're looking at businesses that are in kind of a competitive bidding process, you do have to take those dynamics into account because it can sometimes be really, really dangerous. obviously if demand is low, it tends to be worse for those businesses. But when demand is high, like it is right now, and obviously like Comfort Systems is exposed to, it's a really, really good thing, which helps boost margins. But getting back to kind of competitive advantages here. So whenever I look at a business's competitive advantages, I like to look at whether they are widening or shrinking.

44:41So you brought up in your initial pitch that you thought Comfort Systems wasn't necessarily the strongest business in terms of having a moat. And I agree with you then actually, and I still do. But the one competitive advantage that you highlighted was that they are highly specialized and they have this kind of geographic advantage that helps them stay sticky with their current customer base. Now, one additional advantage that I think Comfort Systems has is developing the ability to work on just larger, larger projects. So at the end of 2025, they had about$24 billion in aggregate contract value spread across nearly 8 ,500 projects.

45:12And one project was reportedly worth about$470 million. So just massive in scale. Now, if you're Looking at that from the point of view of, let's say, a local or even a regional competitor, if they don't have a balance sheet that Comfort Systems has, they're just not going to be able to bid on a project anywhere close to that size. So if we use Hamilton Helmer's framework, I would consider this to be kind of a corner resource. Since competitors don't have access to the same balance sheet, they simply cannot participate in those same contracts that Comfort Systems can easily pursue. This is for sure becoming a much more powerful advantage for them as they begin working on larger and larger projects and as the financial scale of those projects grows.

45:51Yeah, well, that's the beauty of a good business, right? They surprise you consistently to the upside. So I'd like to just briefly cover how this advantage really works, because when I first read it, it was kind of confusing. So they have something called surety bonding capacity, which allows them to secure these larger projects. Now, when I first read that, I was thinking, what on earth is surety bonding? So you can think of it kind of like this, when a potential customer of Comfort Systems wants a project to be completed, they need to know that the project will be guaranteed to be completed.

46:18If the company, let's say, messes up, let's say they walk off the job, or if the company, worst case scenario, goes bankrupt during the building process, well, then the project is going to be heavily delayed or it might even be canceled completely and no customer is obviously going to want that. So you can think of surety bonding as a type of insurance policy against that risk. A company like Comfort Systems makes a promise to their customer that they're going to finish the job. And if they don't, well, then they have to pay for the job to be completed. And to date, Comfort Systems doesn't have any losses, nor are they expecting any in the future.

46:46It's both a financial advantage, but also it's an intangible asset to having a trusted reputation here. And Berkshire Hathaway is probably the best example of how having balance sheet advantages and a high level of trust can uniquely position them to capitalize on certain deals and lead to excess returns on capital and a lot of value generation for shareholders. And so Berkshire, for example, made a killing helping bail out Goldman Sachs during the great financial crisis. And in part, that was because they had the cash to do it. And Buffett in particular was seen as really a trusted partner to work with.

47:19And going back to comfort systems, I think the fascinating part about surety bonding is that it comes from surety companies, not comfort systems itself. So these companies offer to backstop the bids provided by companies like comfort systems, basically. And so in order to back a company, they're going to have a few different criteria that they focus on. And they'll look at things like how much equity that company has and how much cash it has in the bank. And they'll also look at how long the company has been around for and whether they have a track record of completing larger projects. So again, Comfort Systems' strong balance sheet and track record very much give them a step up against the competition in securing surety bonds at a reasonable price.

48:02Yeah, so essentially the idea is that some small, you know, two truck HVAC company in a tiny town would just simply never get bonded for a hundred million dollar project. As a contractor scales its operations, they also build legitimacy and unlock more opportunities effectively. Yeah, exactly. And so no surety company wants to take a risk betting on a smaller operation if they don't have to. And that creates something of a barrier to entry. But since Comfort Systems obviously has the capacity to see these projects through, unlike really most of its peers, they can get bonded for increasingly large jobs pretty easily.

48:37That allows them to, as we've seen, pretty uniquely be able to scale their margins as the business has grown to an extent that goes farther than probably what you would have expected a regular contracting business to be able to accomplish. where if we're being honest, most contractors are not hugely profitable businesses. That's right. So kind of getting back to that original question of whether their mode is shrinking or expanding, I think when we're looking at this kind of quarter resource advantage, it's probably widening. But if I'm looking at other competitive advantages, I'm not really sure there's one that really jumps out to me.

49:14I've seen some other investors say that serial acquires, just in general, that succeed have processing power. And so for those that are unfamiliar with the idea of processing power is defined as when a business whose organization and activity set enables lower costs and or superior products that can only be matched by an extended commitment. Basically, it just means that processing power has to be built out over time. I think that Comfort Systems model has been compounding over time with them being publicly now for over 30 years and the business was founded all the way back in 1917. So one of the more compelling aspects of the company structure, and I know Sean, you originally commented on this, was like how it's kind of like Berkshire in the fact that they're both decentralized business models.

49:52And this means that corporate headquarters, you know, isn't necessarily calling the shots for every single one of its subsidiaries. They end up delegating a lot of responsibility to some of the lower level managements who are a lot more closer to the end customers and therefore better understand their customers wants and needs. Another part of the business's process that I think has been improving is their move towards prefabrication and modular construction. This allows them to build parts of the project offsite, which helps improve their ability to finish projects, on increasingly more and more complex projects.

50:21Yeah, I think speaking about competitive advantages leads naturally to another area of analysis that we spent some time analyzing with ComfortSystems, and that is capital efficiency. And specifically, I looked at returns on incrementally invested capital between 2015 and 2014, and the numbers were really good, over 25 % returns. To put that simply, what that means is that the business was doing an exceptional job at allocating capital, And given how well the business has done recently, I'm going to guess that their incremental returns are even higher and will continue to be so for some time. And that's really not something you see every day.

50:58For most businesses, we talked about this earlier, they begin to run out of attractive investment opportunities as they scale and incremental returns fall off. But Comfort Systems has managed to prevent that. And similar to how companies like Alphabet and Amazon have managed to use profits from their core business to resist the law of large numbers and drive growth into even more profitable areas like cloud computing. I wouldn't put comfort systems in the same vein as those two companies, but they certainly aren't doing so bad either. That's right. So kind of getting back to your point there, you talked about returns on incremental invested capital.

51:32That was kind of a metric that was heavily popularized by John Huber. And I think he's done an incredible job of just kind of making it understandable and easy to digest. So I was really interested in actually seeing how this number has moved just since 2024, which was the last year that you ended up using for your calculation. So what I ended up doing was just basically extending out your initial analysis. So instead of making 2024 the end period, I use a trailing 12 months number for net income and ended in the second quarter of 2026. Then I just added any additional incremental invested capital.

52:03And with that, I got a number that was very impressive because their incremental ROIC has more than doubled to nearly 60%. And due to this increase, the compounding rate of the business has also increased up to about 39%. This is something I think is a great exercise because it shows that they're actually allocating capital even better. And the market is currently rewarding shareholders because of it. Yeah, it is clear that they've been doing an exceptional job on the capital allocation front with the usual caveat that I think we've discussed at length today, being that much of the organic growth appears to be part of a tailwind that I don't think will last forever.

52:35I feel pretty confident saying that. And so when I first pitched Comfort Systems, they were averaging somewhere around one and a half to two deals per year. And since the start of 2025, they've completed six deals across their mechanical and electrical segments. And so those six deals had a combined purchase price of over$540 million. So they are deploying an unusual amount of capital, I would say, compared to what they've done in years past. And again, And the big question is whether this is a new normal for them or if these opportunities are going to be fast depleted. Yeah. And since I like serial acquires, I tend to get downright giddy when a business is actually increasing its acquisition pace.

53:12But it's also important to really kind of temper your expectations. Most businesses tend to carry a pace that they're comfortable with. And that depends on a few factors, such as the size of their M &A team, as well as the size of their M &A pipeline. Another way that I like to assess capital allocation of serial acquires is to really understand their acquisition criteria. You've looked at plenty of businesses, Sean, and I know that if a company makes an acquisition that doesn't have the right synergies or if they pay the wrong price for it, it can really spell a company's doom or at least cause maybe some unwanted problems in the future.

53:40We saw that with one of our portfolio holdings, Netflix. They passed up a pretty massive opportunity in buying Paramount Skydance. And I was really excited about Netflix getting all that new IP like Superman. And I'm glad, though, that they had the willpower to restrain themselves from making a really splashy and sexy deal. I think that would have been very tempting, but it didn't fall within their financial discipline constraints. And so Comfort Systems is not going to be doing any deals that generate those kind of headlines. But the point is really about having a disciplined criteria that you base your acquisitions around.

54:17Right. So to better understand their acquisition criteria, I just went straight to their source and I tried to use their filings. to see what they kind of spelt out for investors. And on this, I kind of found myself being pretty disappointed. So when you look at a business, let's say like Perimeter Solutions or Lifco, they do a really, really good job of spelling out exactly what they're looking for in potential acquisitions. But when it came to Comfort Systems, I felt like I really had no idea what they were looking for, at least in terms of their own disclosures. Now, this doesn't necessarily mean the company is putting up a giant red flag.

54:46It just means that perhaps they don't want to attract any potential copycats and give them the blueprint to success, which would end up harming comfort systems over the long term. So the next best thing to look at is some of their more recent acquisitions and then try to back out some of the numbers from there. Yeah, so how far back into their acquisition history did you look? Yeah, I didn't go too far. I just wanted to see the last six deals that they've done. Now, luckily for us, they do disclose a decent amount of data, including the purchase price, but they don't always disclose the revenue of these acquisitions.

55:17One thing I do appreciate before I attempt to look at the multiples they pay is that they are using notes to sellers as part of their acquisition payment. Now, I like this because it means that Comfort Systems doesn't actually have to front the entire purchase price itself. So for five of these acquisitions, we actually received the backlog, which also gives us some really good insights into the future revenue generation of these businesses. We know from Comfort Systems' disclosure that they expect to recognize about 75 % of the backlog as revenue over the next 12 months. So knowing this, I created a table to project future revenue based on the backlog, then I applied Comfort System's own margins to its mechanical and electrical segments to estimate future operating earnings.

55:52And this gives us a directionally correct view of what they're paying for in these businesses. I love doing a little reverse engineering with serial acquirers, huh? That's right. Sometimes that's the only way you can do it. So I think, you know, in order to sometimes understand these businesses, you have to be willing to do the work that no one else is doing. And hopefully that's some of the hard work that nobody else is doing. So doing that work, I got numbers that were actually pretty good. You know, the average multiple was around nine times operating earnings. I found this interesting because usually when I look at serial acquirers, this multiple seems a little bit high to me, not really high, but maybe a little higher than what I usually see.

56:29But you also just have to consider how good Comfort System's organic growth has been. So in that case, I'm okay with them paying a little bit higher if they think that they're going to continue to get some organic growth. If you're going to get zero organic growth, then obviously you want to pay an even cheaper multiple. But I will say, to be honest, I'm kind of torn because over the long term, what kind of organic growth can you expect? You know, 26 % organic growth from an explosion in data center spending is completely unsustainable over the long term. Now, one final area that I wanted to highlight is a small hiccup they had in their latest acquisition, which was called Summit.

57:00So if we look at the contingent earn out obligations for fiscal year 2025, they actually decreased by 62 % caused by a lower earn out expense for Summit. They also wrote, this decrease was primarily caused by lower earn out expenses for Summit driven by larger changes in their forecast results in the prior year and as a result of them reaching their maximum cumulative earn out target. So perhaps Summit when purchased was maybe a little too bullish on next year's numbers, but generally you don't like seeing this. Given how well everything has gone for the business, I'm kind of nitpicking here, but I just thought it was worth highlighting here.

57:33And just for the listeners, earn outs are like bonuses for hitting performance targets that the acquiring company pays to the target, the company being acquired. And so if these decrease, it seems like that might be a good thing because costs are declining for Comfort Systems. It's actually more of a bad thing because it means the new business they acquired is underperforming expectations. Exactly. Another area that you pointed out that was a major strength for Comfort Systems in your original analysis was their debt profile. So around the time that you were researching them, they had about$131 million in debt, but also had$860 million in cash on the balance sheet.

58:09On top of that, the business had just generated over$700 million in operating cash flow over the last nine months. So, you know, it's pretty obvious the business was incredibly safe in terms of its debt profile. But given the fact that they've spent nearly$540 million on acquisitions over the last year and a half, I thought it would be a good idea to maybe revisit their debt and see how things have played out since then. Yeah, to the fact that this business has negative net debt was a real positive for me. And not to be too cliche, but Buffett's first role of investing is not to lose money. And I say that kind of tongue in cheek, but if you invest in a business that goes bankrupt, you can lose everything as an equity investor.

58:44Your entire position just goes to zero. So to some extent, good investing is about minimizing catastrophic mistakes as much as it is about finding big winners. And with Comfort Systems, you know, they have a lot of financial leeway. There is a margin of safety built into the business there. And I would say that bankers are probably falling over themselves to lend to a company like Comfort Systems with such a high quality balance sheet because you know that there's such a good credit. Yeah. Bankers can get kind of pushy when they see a good opportunity to make some money. But I don't want to dunk on bankers any more than that.

59:17So you'll be happy to know that Comfort Systems has actually decreased its long-term debt since you looked at them. So as of Q2 of 2026, They currently have$1.8 billion in cash and only$53 million in long-term debt. Last summer, they amended their credit facility to increase borrowing capacity up to about$1.1 billion. But from what I can tell, this is completely undrawn. So all the debt that they're currently carrying is actually from the notes to former owners as part of their acquisition strategy. And these notes carry really, really good interest rates of just about 4 % to 5.5%. It doesn't really surprise me.

59:49I mean, given how much money this business has made and how its cash position has swelled, it does seem obvious that they wouldn't really need liquidity. But the only real reason I can see that they would need to reach into that bank debt is if they found a monster acquisition target with a multi-billion dollar price tag. But that doesn't really fit into their wheelhouse and making these small regional acquisitions of contracting businesses. So I wouldn't expect it, but you can't completely rule it out, I guess. That's right. Now, there really isn't too much more to say when it comes to debt simply because the business just doesn't have that much.

1:00:23The business simply has a beautiful balance sheet as it's well below its debt covenants and is very, very well protected by both equity and cash that it has on its balance sheet. As Charlie Munger would say, I had nothing to add. With that said, how about we take a closer look at management then? And when I first looked at Comfort Systems, Brian Lane was their CEO and president, and he had clearly done a very good job of setting the business up for success. And so interestingly, Lane gave up the title of president in December 2025 to Trent McKenna, who previously had served as the business's chief operating officer, as well as serving some other roles since he joined the company all the way back in 2004.

1:01:03Yeah, so this seems like Brian Lane has perhaps found his successor. You know, he's now about 69 years old, and I don't really blame him for wanting to maybe give up some responsibilities to a possible replacement for him in the future. So the title of president carries a lot of responsibility. And this is probably a good test for Trent McKenna to see if he's the right guy to continue leading this business into the future. Since I think that culture is just a heavily, heavily underrated part of a company's competitive advantage, I'm always happy to see businesses that internally promote. So I actually really like this assignment for Trent.

1:01:34It's hard to really give him an honest review yet because he's been in a position for such a relatively short period of time. So all we can really do is look at some of the operating metrics since he's been there. And I would say so far, they're very good. But to be fair, I'd probably attribute more of that to Brian Lane, their current CEO. It feels like a move in the right direction. And given how long Brian Lane has surrounded himself with this current version of the management team, I can only guess they've also made a large contribution as to why this business has had so much success. And I think another part of the business I highly respect has been just how stable the leadership team has been.

1:02:10Right. The stability and leadership is always kind of a positive because I think it denotes that a business does have this kind of good culture. But unfortunately, I think the market realizes that too, which is why I think stable management of a good company tends to carry a premium price tag on the business. So you probably won't be surprised that this business currently trades on about 31 times operating earnings, which is very high. but you know, given the recent performance, it's probably not all that surprising. Another area worth exploring in regards to management is in insider ownership.

1:02:38So on this end, the numbers don't exactly scream alignment, but I think they're adequate enough. So since 2024, insider ownership has been on a slow decline going from about 1.8 % in 2024 down to about 1.2 % currently. Considering one of the business's founders, William George, who is the CFO is still on the team, I would have liked to see maybe a little higher insider ownership, but it's definitely not a game breaker for me. I'm with you on that. And how about we discuss maybe the incentive plan in more detail then? Because in my initial analysis, I outlined how management compensation at all levels is tied to earnings per share growth and free cash flow.

1:03:14And so that's actually one of the better incentive plans we've probably ever covered on the show, where there's just a real degree of alignment that helps shareholders feel like they will be enriched alongside management. Yeah, I absolutely love this incentive plan. It's probably one of the better ones that I've ever had the privilege of analyzing. Another area I like about this business is that the base salaries all seem to be very decent for a company with a market cap of$60 billion. So all executives are making between$300 ,000 and a million dollars. Now kind of getting back to your point there on the incentives, they're basically just sticking with the exact same thing, which I think is brilliant.

1:03:47They're sticking with earnings per share as well as this kind of free cash flow incentive. So the other thing that I really, really respect for them is that they give targets for earnings per share as well as for free cash flow. Most businesses that I've come across don't actually tell you what those targets are publicly. I assume they just keep them internally so management knows what they need to hit. But for whatever reason, they don't tend to tell shareholders. But in Comfort Systems' case, they actually do disclose these numbers. So listen to this. EPS target in 2023 was about$5.50. And in 2025, it's up to$15.75.

1:04:19The free cash flow cashflow target over the same period went from about$204 million to$302 million. Now, to be fair, the actual numbers are quite a bit higher. So I think it's a target that they have very high conviction in that management can hit. Nonetheless, I feel that the simple act of hitting these targets will create a lot of shareholder value. And obviously, if they exceed them, which they have by a country mile so far, then shareholders are obviously going to be even happier. Now, just to give you an idea of how well management is done, they've received the full 200 % of their target, which is the maximum they're allowed to for each of the past three years.

1:04:50It's pretty safe to say management is top notch here. And the proof is right there in the numbers. Executives have earned very nice performance bonuses, but they've been well-deserved. They've also earned shareholders a pretty nice rate of return, right? With shares compounding at over 100 % annually since 2023. I completely agree. So the only kind of yellow flag I found here is in the declining ownership rates. You know, I think this is a signal that management is maybe converting their options into cash upon vesting rather than holding them. But, you know, I guess I'm okay with this for the most part.

1:05:22I'd obviously prefer that they keep insider ownership above 1%. So there is a risk it drops below that over the next few years if insiders keep selling. But, you know, if you look at this from a strategic standpoint, management might just think that the timing right now is probably when they will get most of the cash from their vested options. Perhaps maybe when this data center chip manufacturing cycle ends and shares become more reasonably priced, they'll be more likely to hold on to them. But we obviously won't know until that actually happens. So when we first looked at the company, our co-host Daniel asked some really great questions about the risk inherent to this business.

1:05:54And so I think we looked at the risk in the business cycle simply because this was to some extent a company that was so closely correlated with the construction cycle more broadly across the US. And that was and has been a pretty volatile industry. But I made the point that Comfort Systems is not only reliant on new builds. So even if new builds are in a rut, about 40 % of its business comes from existing buildings, things like renovations, expansions, maintenance, and repairs. And in an economic slowdown, if there's a cash crunch, some of that stuff can be deferred, but it can only be deferred for so long.

1:06:36And so that sort of serves as a natural hedge for the business. Right. And you can actually argue that the company has further diversified, which I think is another edge for that business. So, you know, now that they have the multiple segments and are working more on technology, which obviously has its own cycles, they're somewhat more protected. But again, once that cycle turns, I can't see how this business maintains its current momentum. And you can probably argue that they're trading more traditional construction related cyclicality for more exposure to just data center or chip manufacturing cyclicality.

1:07:06So the other risk that I point out here is more of an inherent risk in this business that I personally lost money on. And that's just looking at a business that publishes their backlogs and trying to extrapolate future numbers from them. So I've had two very small businesses that had backlogs that I felt were very large for their market cap size. And the fascinating part was that I ended up actually doing well in those bets for a very short period of time. But then the longer I own the business, I started running into some issues. And some of those issues might be that the projects take longer than you think.

1:07:36So the revenue that's recognized originally in a year, maybe that takes 18 months, or maybe that takes two years, or you run into the problem where they're working on just a bunch of different projects, and they have deadlines that come out immediately after they record their earnings. And therefore, they don't get that revenue until the following quarter. So my experience with businesses with growing backlogs, to be honest, hasn't been great. But I will say, you know, looking at this business's revenue, earnings per share and free cash flow, it's absolutely outstanding how steady their growth has been over the last few years.

1:08:03The only KPI that seems to be a little bit more volatile from quarter to quarter is in their free cash flow number. Well, it is, after all, a business that constructs things. And so therefore, you're going to have some fluctuations quarterly in working capital needs. And yeah, that shows up in free cash flows, but it doesn't bother me hugely. I think I'm OK with the lumpy cash flows in the short term because over the long term, it does seem to balance out. it. And since free cash flow has compounded at 22 % a year for the last two decades, I have a lot of faith that they'll manage these working capital needs pretty well.

1:08:36Well, I think it's a time of the episode where we look at the intrinsic value of comfort systems. So since we're revisiting the business, usually we wouldn't see much of a shift in our model, but I actually had to make some pretty big adjustments to the model given the five times in share price appreciation that we've seen so far. Yeah. Yeah. I mean, the original model was built using 2024 numbers and while a lot has changed in that time in the world of AI, so it's definitely due for an update. And just to mention it, you can go into the show notes for this episode below and click to see the model that we're referencing and that's available for free.

1:09:09Exactly. So I went through and rebuilt the model using the trailing 12 months numbers from the first half of 2026. Now, outside of the revenue base number changing substantially, the other part of the model that needed adjustment was obviously on the margins. So the original model had operating margins gently declining from about 10.5%. Now, instead of the margins declining, the business has actually scaled dramatically and operating margins are now running at about 16.5%. So we have to account for that in the model as well. But if I'm being honest here, modeling this business, it's pretty tough.

1:09:39And I think it might actually be even tougher now than when you first modeled it, Sean, simply because I feel the business is now running somewhere around the top of the cycle. And to be quite honest, I'd be lying if I said I had any insights on how much longer this AI cycle is going to last. Well, I'm right there with you on that. I proved to be pretty premature in saying that though. But how did you think about the base case when you tried to model out Comfort Systems' fair value? So I assume that revenue continues to compound at about 13 % per year on average, reflecting some slowdown, but also a new reality where Comfort Systems has more opportunity for growth thanks to AI than it did over the last few years.

1:10:16Now, with the assumptions that the company's valuation multiple comes down, once it's clear we've reached the top of the AI spending cycle, I also tried to approximately account for this by using an exit multiple that is about two thirds of the company's current valuation. Evidently, these are all very subjective inputs where you're trying to be directly correct, even if you're inevitably going to be precisely wrong. So, you know, with all these assumptions, I get a fair value of about$1 ,600 for Comfort Systems, which is a small discount to the current stock price. And this is before applying any margins of safety to determine what might actually be an attractive entry price.

1:10:48The takeaway to me is that Comfort Systems has legitimately seen its intrinsic value increase dramatically thanks to some external factors and their savviness in capitalizing on those opportunities. And so it really is a great business set after this episode. I would be even more excited to own than when we first looked at it, But the range of outcomes here are really, really wide. And so nobody knows where this AI super cycle will lead us. And yet it's become so critical to the intrinsic value of this business, especially at this valuation. And I just couldn't get comfortable owning it at a price that didn't more significantly hedge some of the downside risks, which I don't think are being priced in fully today.

1:11:32I don't think hundreds of billions of dollars are going to be spent indefinitely on AI CapEx and infrastructure. And so I'm sort of in the same place as last time where I'm thinking the business is really good and has continued to exceed my expectations. But buying at these prices feels like really a momentum bet on AI spending, being able to continue as it has. And fortunately for Comfort Systems in the last year, it has very much accelerated. But now we're another year into the cycle and we're at a five times higher stock price and it would just feel really speculative to buy in at these prices it would feel like chasing after an opportunity that has already gone by and so honestly just recognizing my own biases too i have a lot of from this one and i think that clouds my thinking and so rather than potentially doubling down and making a catastrophic mistake by chasing after comfort systems at five times the price from when I first looked at it, I feel like it is probably better to just remain on the sidelines and take a more cautious approach and see where things balance out in the coming years.

1:12:35And maybe look for a moment where the sentiment sharply turns against the business and the market is discounting perhaps the quality of the new data center revenue streams that it will continue to get as those facilities need to be maintained. And that might create a more attractive buying opportunity. Then on the flip side, where sentiment is sort of at an extreme in the other direction, but who knows if or when that will happen. So as painful as it is, I do think the right decision for us is to continue to stay on the sidelines here and recognize that it's okay that this one got away from us.

1:13:11We don't have to chase it and there are always going to be more opportunities. Yeah, absolutely. I completely agree with you, Sean. And it's funny when I was going through this episode, I felt like, oh, I don't want to bash Sean too much saying that he made a mistake in skipping this one. But to be honest, when I looked at it, the more and more I understood the business, the more I actually think he made completely the right decision in not buying it because simply put, there's just so many unknowns in this business. And maybe if we were out there building AI data centers or funding AI data centers and had some idea of how long this CapEx cycle is going to last for, well, maybe we would have some insights that would be like, yeah, this thing's going to last for another 10 years.

1:13:45In which case, to be honest, comfort systems probably would be really, really cheap right now. But again, I have zero conviction And I think Sean also has zero conviction in making that call. And therefore, I think the right call also is to just skip the business. So with that said, that's all we have for you today, folks. But as usual, I'd like to leave you with a quote. And this one is by William Thorndike. The heads of many companies are not skilled in capital allocation. Their inadequacy is not surprising. Most bosses rise to the top because they have excelled in areas such as marketing, production, engineering, administration, or sometimes institutional politics.

1:14:16Once they become CEOs, they must now make capital allocation decisions. Now, this is just a super powerful quote because I completely agree with it. The rare company gets a CEO who can excel not only at the job of running a business day to day, but also in allocating capital well. And I think when it comes to comfort systems, it's very obvious that Brian Lane has excelled at both, which is why it's been such a big winner. And with that, that's all for today. And I'll see you next time. Just a quick note before you go, this episode would not be possible without our friends at fiscal AI. It is the complete stock research terminal that Daniel, Kyle, and I use on every single episode.

1:14:52With every company we dig into, pulling 20 years worth of financials, digging into segment level data, and grabbing quotes from the latest earnings calls, real-time institutional grade data, all in one place. And now with our new AI connector, you can plug that same data, financials, transcripts, fund letters, news, filings, and more straight into Cloud ChatGVT, or whatever AI you use for your own research. If you want to try it yourself, head to fiscal.ai slash T-I-V-P to get 15 % off. The link is in the show notes. That's fiscal.ai slash T-I-V-P. Thanks for listening. Thanks for listening to T-I-V-P.

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1:16:43Thank you.