Comfort Systems USA, Inc.'s (NYSE:FIX) 25% Price Boost Is Out Of Tune With Earnings

Comfort Systems USA, Inc. (NYSE:FIX) shares have continued their recent momentum with a 25% gain in the last month alone. The annual gain comes to 138% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, Comfort Systems USA's price-to-earnings (or "P/E") ratio of 32.9x might make it look like a strong sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 18x and even P/E's below 10x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Recent times have been pleasing for Comfort Systems USA as its earnings have risen in spite of the market's earnings going into reverse. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Comfort Systems USA

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Comfort Systems USA.

Does Growth Match The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Comfort Systems USA's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 76% gain to the company's bottom line. Pleasingly, EPS has also lifted 187% in aggregate from three years ago, thanks to the last 12 months of growth. 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 four analysts covering the company suggest earnings should grow by 10% each year over the next three years. With the market predicted to deliver 10% growth per year, the company is positioned for a comparable earnings result.

With this information, we find it interesting that Comfort Systems USA is trading at a high P/E compared to the market. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Bottom Line On Comfort Systems USA's P/E

The strong share price surge has got Comfort Systems USA's P/E rushing to great heights as well. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Comfort Systems USA currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

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

You might be able to find a better investment than Comfort Systems USA. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.