Comfort Systems USA, Inc.'s (NYSE:FIX) 35% Price Boost Is Out Of Tune With Earnings

Comfort Systems USA, Inc. (NYSE:FIX) shares have continued their recent momentum with a 35% gain in the last month alone. The last month tops off a massive increase of 123% 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 16x, you may consider Comfort Systems USA as a stock to avoid entirely with its 34.6x 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 its earnings growth has been positive while most other companies have been seeing their earnings go backwards. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out 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.

What Are Growth Metrics Telling Us About 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 32% gain to the company's bottom line. Pleasingly, EPS has also lifted 121% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the five analysts covering the company suggest earnings should grow by 11% per year over the next three years. That's shaping up to be similar to the 11% each year growth forecast for the broader market.

In light of this, it's curious that Comfort Systems USA's P/E sits above the majority of other companies. 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.

What We Can Learn From Comfort Systems USA's P/E?

Shares in Comfort Systems USA have built up some good momentum lately, which has really inflated its P/E. 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. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Having said that, be aware Comfort Systems USA is showing 1 warning sign in our investment analysis, you should know about.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.