Frontdoor (FTDR) Up 65% in 2023: Will the Rally Continue?
Shares of Frontdoor, Inc. FTDR have surged 65.4% in the past year compared with the Zacks Building Products – Miscellaneous industry’s rise of 57.4%. The company is benefiting from improved contract claims costs and customer retention. Also, the emphasis on home warranties and on-demand home services bodes well.
The Federal Reserve's recent decision to stabilize interest rates signals optimism for the housing market and related industry. Federal Open Market Committee (FOMC) has kept interest rates at a 22-year high of 5.25-5.5%, with hints of potential rate cuts by the end of 2024. This stability is a relief for the overall housing industry.
This Zacks Rank #2 (Buy) company’s 2024 earnings and sales are likely to witness growth of 15.1% and 5.7% year over year, respectively. Earnings estimates for 2024 have increased 25.1% upward in the past 60 days. This positive trend signifies bullish analysts’ sentiments, indicating robust fundamentals and the expectation of outperformance in the near term.
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Let’s discuss the major driving factors.
Improved Contract Claims Costs and Margins
The company demonstrated its capacity to regain margins through pricing and process improvement initiatives quickly. The company is taking bold and decisive steps to lay a strong foundation for future growth. During the third quarter of 2023, the company's gross margin expanded 760 basis points (bps) year over year to 51% on the back of increased traction from its continued process improvement initiatives.
During the quarter, contract claims cost decreased to $22 million compared to the prior year quarter. Improved contract claims costs were driven by higher realized prices, cost efficiencies, a transition to higher service fees and fewer service requests per customer, partly offset by inflationary pressures. During the quarter, favorable claims cost development was $9 million compared with a $2 million favorable adjustment in the prior-year quarter.
Home Warranties and On-Demand Services to Drive Growth
The company's American Home Shield brand continues to focus on selling home warranties. American Home Shield is positioned as a 12-month home warranty contract. The company perceives the home warranty category as undifferentiated and believes there's an opportunity to revitalize American Home Shield through a brand relaunch in 2024. The aim is to highlight the benefits of a home warranty, tapping into consumer research indicating a sizable market of homeowners seeking financial protection and peace of mind for inevitable breakdowns of home systems and appliances.
The Frontdoor brand is shifting towards on-demand home services, adopting a pay-as-you-go model. The company's future strategy focuses on providing an on-demand offering, with an emphasis on an a-la-carte experience for a broader homeowner audience, supported by research and the success of the HVAC upgrade program. Frontdoor's value proposition centers on on-demand access to a network of experts for repairs, maintenance services and upgrades, facilitated through a modern app-based interaction featuring video chat with live experts. While specific products and timing for the 2024 Frontdoor offerings are still in progress, the focus is primarily on three categories: on-demand repairs, maintenance services and upgrades for home systems and appliances.
Focus on Customer Retention Bodes Well
Although the company observed soft demand in direct-to-consumer (DTC) and real estate channels during third-quarter 2023, it witnessed a positive trend in the renewal channel. Despite implementing an 11% realized price increase, the overall retention rate increased by 90 bps to 76.2%. This improvement is attributed to the renewals team's efforts, improved onboarding, increased customer engagement and enhanced service experience through greater deployment of preferred contractors.
The Frontdoor brand, launched earlier in the year to target a different homeowner segment, has gained significant traction with more than 1.3 million downloads and 133,000 account registrations within six months, demonstrating the strength of its app-based interactions and video chat features.
Other Key Picks
Some other top-ranked stocks from the Zacks Construction sector are:
Fluor Corporation FLR sports a Zacks Rank #1 (Strong Buy). It has a trailing four-quarter earnings surprise of 37.5%, on average. Shares of FLR have surged 17.5% in the past year. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for FLR’s 2024 sales and earnings per share (EPS) suggests growth of 12.4% and 197.6%, respectively, from the year-ago period’s levels.
M-tron Industries, Inc. MPTI currently sports a Zacks Rank of 1. MPTI delivered a trailing four-quarter earnings surprise of 35.6%, on average. It has surged 327.1% in the past year.
The Zacks Consensus Estimate for MPTI’s 2023 sales and EPS indicates growth of 30.6% and 156.7%, respectively, from the previous year’s levels.
AECOM ACM carries a Zacks Rank of #2. It has a trailing four-quarter earnings surprise of 2.1%, on average. Shares of ACM have surged 10.4% in the past year.
The Zacks Consensus Estimate for ACM’s 2024 sales and EPS indicates an increase of 4.5% and 17.5%, respectively, from the year-ago period’s levels.
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