Ryan Packard pitches Comfort Systems at Sohn 2025

Good afternoon. I’m Ryan Packard, the founder of Hidnight Capital. I’m excited and grateful to be here to share with you one of our favorite portfolio investments. These are the disclaimers. Just as a reminder, we may trade in or out of this idea without notifying anyone.

1. The AAA Framework

We at Hidnight Capital, like many people in this room, spend our time trying to find great businesses that can compound capital consistently over very long periods of time. One of our favorite places to hunt, both long and short, is in companies that actively manage their own portfolio and capital through M&A. We call them adept, advantaged acquirers, or AAA for short.

Over the last 10 years, our 3 favorite companies that fit the AAA construct are Broadcom, Constellation Software, and Transdime—3 businesses that I’m sure many of you are familiar with. When we look at possible AAA businesses, we think the 2 most important metrics to measure are consistency of return on invested capital and the ability to redeploy capital inorganically on top of organic growth.

As you can see from these numbers, these 3 companies have been able to redeploy the vast majority of their operating capital through M&A. Equally importantly, when they deploy their own capital, it’s at a consistently above-market rate of return.

2. Meet Comfort Systems

I’m here today to tell you about a fourth company that we think belongs on this storied list. The name of that company is Comfort Systems. The ticker is FIX. Comfort Systems is a $15 billion market cap company that is the second largest employer of skilled construction contractors in the United States.

Eighty-five percent of its 19,000-strong labor force goes to a job site every day with a tool in their hands to construct some of the most complex and critical facilities that make up the backbone of the United States’ industrial manufacturing economy. FIX has 178 locations across 135 cities, covering 100% of the businesses in the United States with a focus on midsize markets. They typically own the market leader in each city, with longstanding, deep relationships across the supply chain.

In terms of business mix, the segments are 75% mechanical—think HVAC—and 25% electrical. In terms of vertical, 60% is industrial, between manufacturing and technology; 25% is institutional; and 15% is commercial.

Based on our projections, we believe FIX can grow its earnings per share at approximately 25% a year for the foreseeable future. If they do that, we think the stock can double over the next 3 years.

3. The Onshoring Growth Thesis

As an industrials-focused investor, I’m often asked, “What is the best U.S. onshoring play?” We think the answer to that question is FIX. When someone builds a new industrial building in the United States, chances are they call FIX to bid on the wiring, the HVAC, and the plumbing installation for the project.

4. M&A Drives The Flywheel

Over the years, FIX has increased their skills both organically and inorganically, creating a positively reinforcing flywheel that has produced impressive financial results. The company has grown EPS from 75 a share in 2014 to $14.60 a share in 2024, a 19-times increase over the last 10 years.

These results were achieved despite a meaningful headwind from most U.S. manufacturers offshoring large swaths of capacity over the past 25 years. We believe those headwinds are on the precipice of turning into tailwinds within Midnight’s AAA framework.

FIX has an excellent track record of capital allocation over the last decade, cumulatively spending almost 100% of its free cash flow on acquisitions from 2009 to 2021. Along the way, they were able to maintain greater than 25% pre-tax ROIC, a rare feat for a company this inquisitive.

5. Why Competition Stays Low

Yet it’s only accumulated about 2% market share in the United States. This leaves a long tale of M&A targets. Importantly, acquirer competition is low despite the very attractive returners.

FIX typically pays 5 to 7 times IBIDA before synergies. The primary reason for the lack of competition is that bonding requirements prevent leverage at the operating company from exceeding 1 time, which, one, deters private equity, and, two, makes it hard for small players to access capital to compete.

FIX’s leverage is at the low end of its historical range, and I expect that there will be meaningful further M&A in the future.

So, in conclusion, long-term FIX has an 18-year history of a 25% total shareholder return kagger, and we see a 5-year outlook at a similar rate of compounding. Short-term, FIX is in the sweet spot of structural tailwinds from onshoring and AI construction that will persist likely well beyond market expectations.

We believe this puts FIX squarely in Midnight’s AAA framework as an adept, advantaged acquirer, and we look forward to watching it grow over the years to come. Thank you.

Thanks, Ryan. I’m going to ask my question, but just 2 quick shout-outs. First, to Paulino Lopez, who invited me and the speakers up today. Paulino, wherever you are, thank you very much. He’s one of the smartest LPs in the business.

And just a quick shout-out to my daughter, my 15-year-old daughter, in the audience. Hopefully, in 20 years she’ll be pitching.

Ryan, I guess my question is, it sounds like a great business. But whenever I talk to friends of mine in the contracting business, the number one thing they complain about is labor—both the availability of it and the cost, and how hard to predict and variable it is. In some ways, they feel powerless to the availability and cost of labor. How do you think about how the cost and availability of labor factor into your thesis?

6. Labor Is The Moat

Sure. FIX has consistently grown its labor pool over the years. The management team thinks that they can grow it, call it, 6% a year going forward. If you look, they’ve effectively compiled the second-largest pool of skilled construction labor. At this point, it’s an institution.

I think that probably a lot of the friends you’re talking to are much smaller businesses that, frankly, are more cyclical in terms of the undulations of the underlying market. FIX, at this point, has a number of specialties, but it is particularly good at manufacturing facilities for semiconductors, pharmaceutical manufacturing, and AI data centers.

Those are things that the current administration seems extremely focused on, as are investors and the end users. FIX’s ability to draw talent into its business and retain that talent is one of its big competitive moes, if you will.

They walk you through some very interesting math about how quickly you can train an electrician or plumber. It usually takes about 5 years of apprenticeship for somebody to become a master electrician or plumber who can work on one of these bonded sites. So, when they make the investment in somebody, they bring them on full-time, and they tend to stick with them for quite a long time.

Fortunately, FIX is in the position where they don’t have a shortage of labor because they treat their people so well,