Summary

Comfort Systems USA has agreed to acquire Walker TX for $203 million plus earnouts.

Walker is a large electrical and industrial contractor in Texas.

FIX has been eyeing the electrical contracting business for some time and the deal provides it with a complementary trades for large projects.

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Quick Take

Comfort Systems USA (FIX) announced it has agreed to acquire Walker TX for $203 million in consideration plus potential earnouts.

Walker TX operates as a commercial electrical and industrial contractor in Texas.

With the deal, FIX gains a complementary trade with expertise in larger projects amid a promising infrastructure spending environment.

Target Company

Irving, Texas-based Walker TX was founded in 1981 to provide ‘commercial electrical, network, end-user, industrial and related services in Texas’.

Management is headed by CEO Scott Walker, who has been with the firm since 2004.

Below is an overview video of the company’s engineering services:

Source: Walker Engineering

Walker TX’s primary offerings include:

Electrical Contracting Network Services Audio/Visual Services Security Services Industrial Electrical Services Automation & Control Services

Company partners or major customers include:

Control Systems Engineers Control System Integrators Association Certified Automation Professional Certified Control Systems Technician International Society of Automation

Source: Walker Industrial

Market & Competition

According to a market research report by Research and Markets, the US electrical contracting market was valued at $110 billion in 2010.

Half of all electrical contracting purchase are related to new construction buildings, 30% of them are for the replacement of electrical systems in already-built constructions. Maintenance, repair, and replacement services account for about 20% of the whole industry.

Major competitive vendors that provide electrical contracting services include:

EMCOR Group (EME) Rosendin Electric Integrated Electrical Services (IESC) MYR Group (MYRG) Bergelectric Corp

Source: Sentieo

Acquisition Terms and Rationale

Comfort disclosed the acquisition price and terms as $178 million in cash, $25 million promissory note and an unspecified earnout based on agreed-upon EBITDA targets during each of the years following closing of the transaction through the end of 2023.

Based on Walker’s current EBITDA of ‘$20 million to $25 million,’ the deal represents an EBITDA multiple of approximately 9x at the midpoint of Walker’s expected EBITDA contribution.

Comfort said ‘the acquisition is expected to make a neutral to slight accretive contribution to earnings per share during the first 18 to 24 months after the acquisition.’

A review of FIX’s most recent 10-K filing indicates that as of December 31, 2018, it had $45.6 million in cash and equivalents and $564.5 million in total liabilities, of which long-term debt accounted for $73.6 million.

Free cash flow during the twelve months ended December 31, 2018, was $121.6 million.

So, it appears FIX will need to tap credit lines or obtain additional other debt in order to close the transaction.

Comfort is acquiring Walker and its subsidiaries to expand into the electrical and industrial contracting market in Texas.

As Comfort CEO Brian Lane stated in the deal announcement,

Walker brings best-in-class electrical expertise and a stellar reputation to Comfort Systems USA…we believe that they will provide us with a strong base for continued growth and investment in the electrical contracting business that will complement and strengthen our existing mechanical, plumbing, controls, fire suppression and electrical lines of business across the United States.

In the past 12 months, FIX’ stock price has risen 25.8% vs. Emcor’s (EME) drop of (9.9%), as the chart below indicates:

Source: Sentieo

Earnings surprises in Comfort’s recent history have generally been positive, although its most recent result was a negative surprise for Q4 2018’s results:

Source: Seeking Alpha

Analyst ratings are evenly split between ‘Strong Buy’ and ‘Hold’ and the consensus price target of $58.67 implies a 10% upside from the stock’s current price at press time of $53.34:

Source: Seeking Alpha

Analyst sentiment in recent earnings calls has been uneven but within a tight range, according to a linguistic analysis:

Source: Sentieo

Commentary

The deal for Walker represents a number of new elements for FIX.

First, it will gain access to bigger projects, as Walker is a prominent contractor on major projects in Texas.

Second, as a result, the Walker unit will generate a net lower gross margin percentage but, but will add to EBITDA as previously described.

Third, Comfort management has been looking closely at the electrical industry for several years, since that trade interacts heavily with its HVAC and other operations.

So the acquisition promises to be complementary to FIX’ existing operations, add EBITDA, and provide much larger project expertise to its portfolio.

Although Comfort will need to add debt to fund the deal, the firm has relatively low long-term debt and ample free cash flow to service the new debt load.

As U.S. government entities make noises to increase spending on infrastructure, the combination could prove prescient in the years ahead.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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