After Leaping 26% Comfort Systems USA, Inc. (NYSE:FIX) Shares Are Not Flying Under The Radar

Comfort Systems USA, Inc. (NYSE:FIX) shares have continued their recent momentum with a 26% gain in the last month alone. The last month tops off a massive increase of 174% in the last year.

After such a large jump in price, given close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 19x, you may consider Comfort Systems USA as a stock to avoid entirely with its 41.7x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Comfort Systems USA certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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Does Growth Match The High P/E?

In order to justify its P/E ratio, Comfort Systems USA would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered an exceptional 63% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 223% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 25% over the next year. Meanwhile, the rest of the market is forecast to only expand by 15%, which is noticeably less attractive.

In light of this, it's understandable that Comfort Systems USA's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

Comfort Systems USA's P/E is flying high just like its stock has during the last month. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Comfort Systems USA maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

Before you take the next step, you should know about the 1 warning sign for Comfort Systems USA that we have uncovered.

If these risks are making you reconsider your opinion on Comfort Systems USA, explore our interactive list of high quality stocks to get an idea of what else is out there.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.