Notwithstanding the muted performance, Guggenheim is taking a bullish stance.
Jake Fuller initiated coverage of Frontdoor with a Buy rating and $40 price target.
Frontdoor is investing in the core home warranty business and formulating plans to roll out an on-demand service to make inroads into the $400-billion home services category, Fuller said in the Monday initiation note.
The company is looking to expand into home maintenance and improvement services, leveraging the customer and service pro network, the analyst said.
Fuller named what he sees as both positives and negatives for Frontdoor in the note.
- Frontdoor is the category leader in the home warranty category, with over 50% share, and the category is a $38-billion opportunity — although penetration is as low as 6%.
- The business model is appealing, with strong visibility, as 67% of the plans are on auto renew, unit economics are favorable and growth is healthy.
- Although visibility into Frontdoor's on-demand ambitions is limited, the company has a team with the pedigree to go after the opportunity.
- As the company invests in both core business and on-demand launch, EBITDA margin is likely to compress in 2019.
- On-demand service, though it makes sense strategically, will require substantial investment to reach scale.
- The model suggests volatility in the cost-of-goods-sold line, with factors such as weather impacting call volume and skewing the repair-replace balance.
Guggenheim projects 9% top-line growth for the first quarter premised on a 5-6% increase in service plans and 3-4% hike in pricing. The firm models deleveraging on SG&A, with spending ramping on migrating business to the cloud, improved customer service and on-demand R&D.
"FTDR has characterized 2019 as a year in which it formulates the on-demand playbook, and that could mean that 2020 would be an investment year if it is ready to make a bigger push," Fuller said.
The Price Action
Frontdoor shares were slipping by 2.77 percent to $34.52 at the time of publication Monday.
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Photo courtesy of Frontdoor.
Latest Ratings for FTDR
|Apr 2019||Guggenheim||Initiates Coverage On||Buy|
|Mar 2019||SunTrust Robinson Humphrey||Initiates Coverage On||Buy|
|Mar 2019||William Blair||Initiates Coverage On||Outperform|
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