Comfort Systems Looks More Than Comfortable

Only in America could a plumbing business be so successful. Americans are brilliant at taking an activity, doing it well, rolling it out across the continent, making tons of money and translating those results into a relentlessly rising share price.

American Shareholder Capitalism One Of The Wonders Of The World

This may seem trivial, but it has translated into rising living standards for 100s of millions of Americans. Anyone who thinks America’s wealth is just about a few billionaires is mistaken. American shareholder capitalism is deservedly one of the wonders of the modern world.

It is partly because the US is a land of immigrants, full of energetic people who went there to better themselves. The disdain many Europeans have for North America and its get-up-and-go attitudes is pure snobbery.

We, as a nation, still rely to an extraordinary extent on the drive and ambition of our Victorian ancestors who would spin in their graves to see how ineffectual their descendants have become, endlessly arguing over how to share out the cake rather than rolling up their sleeves and making it bigger.

The graphic above tells you several things about Comfort Systems. It tells you something about what it does, it reveals how growth has come from physically expanding across the USA and it suggests, correctly, that acquisitions have played an important role in that growth. Successful acquirers can achieve especially rapid growth.

The business is amazingly strong.

We had a fantastic quarter as our teams achieved superb execution for our customers. We earned $3.74 per share this quarter, which is an increase of over 90pc compared to a year ago. Our Mechanical business exceeded last year and our Electrical segment achieved unprecedented margins.

Both operating income and EBITDA dollars increased by 100pc this quarter compared to 2023. Demand remains strong, especially in the industrial sector, including technology and other manufacturing customers. Our backlog continues to track at high levels, despite our strong revenue for the quarter. Backlog is $5.8bn, far higher on both an absolute and a same-store basis than this time last year, and we continue to select work that has good margins and good working conditions for our valuable people.

Brian Lane, CEO, Comfort Systems, Q2 2024, 26 July 2024

The business is stunningly cash-generative.

Free cash flow for the first 6 months of 2024 was $290m. We continue to benefit from advanced payments for work that we will fund and complete in upcoming quarters, and operating cash flow continues to exceed our earnings by about $300m on a trailing 12-month basis. So we are well ahead of earnings in collecting our cash.

Even with two notable acquisitions earlier this year, we have succeeded in retiring all of our bank debt as of June 30, 2024, and other debt was $91m with cash balances exceeding our debt. We also spent around $11m on share repurchases this quarter.

Bill George, CFO, Comfort Systems, Q2 2024, 26 July 2024

There is more technology about these businesses than you might at first imagine.

Our revenue mix continues to trend towards data centres, chip fab, battery plants, life science and food. Industrial customers accounted for 60pc of total revenue in the first half of 2024, and they are major drivers of pipeline and backlog.

Brian Lane, CEO, Comfort Systems, Q2 2024, 26 July 2024

Comfort Much More Than Just A Plumber

We have added incremental space within the last few months. We’re more likely to do things incrementally and I do want to say that one of the things that we emphasised when we took the additional million square foot of space that we took recently, we took space that was much more configured for automation. A lot of our goal is going to be to improve the production and productivity of the newly deployed space.

Ultimately, Comfort is going to take the amount of work we can execute. And with people — there are businesses that you can scale easily. This is a business that you’re doing things in the real world. You’re delivering things that are three-stories tall and 100 yards long and have incredible complexity inside them. And you have to respect the difficulty of what you’re doing and make sure we will always put our ability to keep our promises to our customers above pushing for growth on the top line.

Brian Lane, CEO, Comfort Systems, Q2 2024, 26 July 2024

This is another thing which is great about US businesses. The customer is always front of mind.

Demand Strongest In 40 Years

What about demand?

The thing you look at, we look at, Adam, is, what’s the demand, what our pipelines look like? They’re robust. It’s in all the markets we serve. It’s probably as strong. I’ve been doing this for 40-some years. It’s probably the best market I’ve ever been in. So we’re pretty optimistic. There’s going to be plenty of work for a while.

Brian Lane, CEO, Comfort Systems, Q2 2024, 26 July 2024

The explosive growth in data centre demand is a big factor in what is happening at Comfort Systems.

If you don’t mind, I’ll just comment on data centres. People seem to be concerned that something’s happening with the data centre build. What we are hearing from our customers and experiencing in the market is that they are continuing to believe in deploying data centres. They’ve bought a lot of very, very expensive computer chips. They’re taking delivery of those on a regular basis.

Our understanding is they’re going to be deployed into servers and put in buildings that are going to need to be cooled. They’re going to need to be heated. I mean, sorry, they’re going to need electricity because they’ll be heated by the data — by the servers.

And also, we’re seeing data centre work pop up in places that hasn’t started yet in states where we hadn’t seen data centres before. So it’s possible, I guess that that’s slowing down, but I will say if that’s happening, it’s certainly not in anything that we can see or experience in our vision or our markets or in our conversations with our customers.

Bill George, CFO, Comfort Systems, Q2 2024, 26 July 2024

Share Recommendations (24 September 2024)

Comfort Systems. FIX

Nvidia NVDA

Meta Platforms. META

Spotify Technology. SPOT

Cava Group. CAVA

Wingstop Inc. WING

Strategy – Buy Comfort Systems And Other Great US Shares

Technology Shares Look As Hot As Ever

Many hedge funds have reportedly sold technology, AI, and Nvidia shares. More fool them say I. This chart could hardly look stronger and there is no sign of any chink in the fundamental case for Nvidia. It is a fantastic business, arguably the greatest ever, at the top of its game. The hardest thing with great investments is to hang in there. Even the pros struggle with that one.

Another mega-cap looking promising is Meta Platforms. The company seems endlessly mired in controversy but remains undeflected from its mission.

AI is going to transform Meta Platforms and through them peoples’ lives.

AI is also going to significantly evolve our services for advertisers in some exciting ways. It used to be that advertisers came to us with a specific audience they wanted to reach — like a certain age group, geography, or interests. Eventually we got to the point where our ads system could better predict who would be interested than the advertisers could themselves. But today advertisers still need to develop creative themselves. In the coming years, AI will be able to generate creative for advertisers as well — and will also be able to personalise it as people see it. Over the long term, advertisers will basically just be able to tell us a business objective and a budget, and we’re going to go do the rest for them. We’re going to get there incrementally over time, but I think this is going to be a very big deal.

Mark Zuckerberg, CEO, Meta Platforms, Q2 2024, 31 July 2024

Meta Investing For Decades To Come

It’s all about money.

At the end of the day, we are in the fortunate position where the strong results we’re seeing in our core products and business gives us the opportunity to make deep investments for the future — and I plan to fully seize that opportunity to build some amazing things that will pay off for our community and our investors for decades to come. The progress we’re making on both the foundational technology and product experiences suggests that we’re on the right track. I’m proud of what our team has accomplished so far and I’m optimistic about our ability to execute on the opportunities ahead.

Mark Zuckerberg, CEO, Meta Platforms, Q2 2024, 31 July 2024

Also exciting is Spotify.

To tackle our MAU [monthly average user] challenge, we’re doing two things. First, we’re intensifying our efforts to improve the impact of our marketing, and we believe there are a number of levers to pull over the upcoming quarters. Second, we are prioritising enhancements in our free product pipeline that, based on existing performance in certain markets, should boost engagement and retention, especially in our developing markets. Further additional improvements will be integrated into our free experience in the coming months.

While I am disappointed with our MAU miss, I see the reversal as more of a when rather than an if. The reason I feel so confident is that overall, we’re seeing healthy MAU engagement trends year-over-year, so the users we are now acquiring we’re also retaining, which is a great leading indicator for value and future monetisations.

I know the impact of MAU on our subscriber growth will be top of mind for some of you, so I want to discuss what I think this means in the short to midterm. Historically, our conversion funnel was quite straightforward: a listener would come in as a free user and over time convert to our standard premium tier. This process has evolved given the bifurcation between developed and developing markets and the increased number of subscription offers we now offer. This means the relationship from free to paid is no longer a one size fits all scenario, and we’re less dependent on new free users to fuel our revenue growth in the short to midterm.

Take for example our developed markets. With both the widespread awareness of our offerings and the strong affinity for Spotify products, we see many users subscribing directly to our paid tiers without any trial period. Additionally, the high engagement in these markets gives us tremendous confidence in our ability to raise prices, allowing for strong revenue growth even as those markets continue to mature.

To close, I want to go back to how I opened: we set out a very ambitious goal to transform our business and there are many ways to grow Spotify today. It’s not a linear path dependent on any one metric. We have more options than ever. But to also be very clear, I have no doubt that we will also capture the top of funnel growth over time while we continue to focus on monetisation.

Daniel Ek, CEO, Spotify, Q2 2024, 23 July 2024

Incredible Value Of Spotify Offering

Spotify missed its target for monthly average users with its latest quarterly results and CEO and co-founder, Daniel Ek, felt the need to address that issue. Monetisation is going well and he believes it is a matter of time before MAU acquisition trends improve. I agree because the product is amazing. I am a more than satisfied user and would readily pay double for the service. The value is astounding.

Thanks to the hard work of our teams, we beat on subs. We also expanded gross margin and had our highest free cash flow quarter ever. This quarter also marked three consecutive quarters of profitability as we continued to execute on what you’ve heard me describe as a year focused on monetisation.

So how have we done this? Well, we have expanded our subscription offerings to consumers who might be looking for different types of content. By introducing new subscription plans, we are successfully giving subscribers even more listening choices with options like the audiobooks access and basic tiers that also builds on our already robust list of premium plans around the world, including individual, duo, student, family, and mini passes.

In addition to this expansion, we also implemented a price increase in several key markets, including in the U.S., which we’re rolling out now with great success. In fact, we’re seeing less churn in this round of increases than we did in our prior one, which was already very low by any measure. I attribute this to the tremendous value we’ve added to our service over the last several years. Our subscribers now get access to 250,000 audiobooks, more than 6m podcasts, and of course pretty much the world’s entire music catalogue in one experience. In the U.S. today, access to all of this content would cost a user approximately $26, significantly more than a Spotify subscription.

Daniel Ek, CEO, Spotify, Q2 2024, 23 July 2024

Cava is in great shape.

Our average unit volume, or AUV, rose again in the quarter. We generated more net income than all of last year, and we delivered our second consecutive quarter of free cash flow. We believe our strong balance sheet and ability to self-fund growth allows us to continue to grow market share in this uncertain economic environment. Our second quarter highlights include a 35.2pc increase in CAVA revenue, driving AUV of $2.7m, CAVA same-restaurant sales growth of 14.4pc, with traffic growth of 9.5pc, 18 net new restaurants, ending the quarter with 341 restaurants, a 22.2pc increase year-over-year.

Brett Schulman, CEO and co-founder, Cava Group, Q2 2024, 23 August 2024

Cava has a great story.

Unprecedented Growth For The Cava Brand

Consumers are hungry for flavorful, healthy, and innovative food, want the convenience of engaging with brands on their terms and in an increasingly automated world crave human connection. From our relevant differentiated cuisine to the robust digital and physical experiences we provide and our unique brand of Mediterranean hospitality, we are meeting the moment for the modern consumer. As evidenced by our outstanding second quarter results, our value proposition is resonating with guests. And as we define the next large-scale cultural cuisine category, we are well positioned to create long-term value for our guests, team members and shareholders.

Brett Schulman, CEO and co-founder, Cava Group, Q2 2024, 23 August 2024

Another amazing performer in the fast food/ casual dining category is Wingstop.

Who Says Chicken [Wings] Can’t Fly

The last quarter’s results were so good they are hard to credit.

In the second quarter, we delivered 28.7pc same-store sales growth, which was almost entirely driven by transaction growth. This sustained top line growth continues to strengthen our unit economics and is increasing demand for growth from our brand partners as our development pipeline strengthens.

We opened 73 net new restaurants, a record Q2. And we delivered adjusted EBITDA of $51.8m, representing a 50.7pc growth rate over the prior year. I am truly humbled to be part of a brand that is experiencing such unprecedented growth.

Michael Skipworth, CEO, Wingstop, Q2 2024, 31 July 2024

If it works don’t change it.

The first Wingstop opened in Dallas, which began our journey pioneering wings as a centre of the plate meal occasion. Over the last 30 years, not a lot has changed with our brand.

We added boneless wings, tenders, and the chicken sandwich. And we have remained focused on our simple operating model and delivering guests that indulgent Wingstop occasion that is centered around quality, cooked-to-order wings, soft and tossed in our bold, distinctive flavors.

That original Wingstop remains open today, doing roughly $4m in sales out of that simple, efficient footprint, and is still experiencing transaction growth 30 years later. While we have a lot to celebrate and be proud of over the past three decades, I can confidently say that we are just getting started here at Wingstop.

A little over two years ago at our Investor Day, and shortly after assuming the role as CEO, we outlined several multi-year strategies that supported Wingstop’s category of one positioning and AUV growth from the then system average of $1.5m to a target of $2m.

These are the same strategies we are executing against today that consist of scaling brand awareness, new innovation, expanding our delivery channel, data-driven marketing, and our digital transformation. We were confident that our multi-year strategies would lead to strengthened returns for our brand partners, which in turn would create significant demand for growth.

Fast forward to today, just two years later, and our AUVs are now above $2m. Yet, as we look at the success of these strategies we are executing against, we see meaningful runway in front of us. I can sit here today with the same level of confidence in these sustaining sales strategies as I did two years ago at our Investor Day.

And this is what gives us confidence to announce today a new AUV target of $3m.

Michael Skipworth, CEO, Wingstop, Q2 2024, 31 July 2024

This performance is putting a rocket under the physical growth of the business.

The combination of our AUV growth and strengthening unit economics is fueling a record pace of development. In the last 12 months, we have opened more than 300 net new restaurants, showcasing the excitement of our brand partners to open more Wingstops.

And it is important to note that over 95pc of our restaurants were opened by existing brand partners reinvesting. Our pipeline for future restaurant commitments is the strongest it’s ever been.

Michael Skipworth, CEO, Wingstop, Q2 2024, 31 July 2024

The scope is huge.

We reevaluated our total addressable market in the U.S. through a combination of a top-down and bottoms-up build from a trade area-specific standpoint. This work has led to refreshed market plans and playbooks, and I’d like to announce an updated unit potential in the U.S.

We now believe we can support over 6,000 restaurants domestically, more than tripling our current U.S. footprint. When you combine this with our opportunity outside of the U.S. and the early success we’re having in markets from the Asia-Pacific region to Western Europe to North America, we believe we can scale Wings up to more than 10,000 restaurants globally.

Similar to the U.S., we are seeing double-digit same-store sales growth trends, which is primarily driven by transaction growth. Our international AUV growth has grown more than 82pc in the last two years. We have a clear playbook for international markets, and I believe our international business is supercharged for growth.

We remain anchored in the foundation of our strategy, investing in our people and our culture, what we refer to as the Wingstop Way. We view our people and our culture as a competitive advantage.

As we look towards Wingstop’s opportunity to scale globally, we believe we have clear line of sight to scaling Wingstop into a top-ten global restaurant brand. It is an incredibly exciting time at Wingstop.

Michael Skipworth, CEO, Wingstop, Q2 2024, 31 July 2024