Weekly Equity Idea Highlight - 2020 07 20
The market is expecting FTDR to see significant competitive pressures as it seeks toexpand its footprint in the home care space, not recognizing the strong competitive moats
and economies of scale of the company's business model that are further benefitting from
macro tailwinds for the business.
The market expects the company, which has seen impressively high UAFRS-based
(Uniform) ROA above 600% levels, as a marketplace similar to Booking.com, to see returns
decline by roughly half from 2019 levels, not recognizing that as the company continues to
scale, it is only going to see higher returns, or stabilize at worst.
Frontdoor offers a home protection marketplace for new and existing homeowners.
Homeowners subscribe to frontdoor's offering and, in return, they get a fixed cost if any
appliances ever breakdown, from a reputable contractor that frontdoor refers to the
homeowner.
Frontdoor has built a massive marketplace, as it rolled up the home repair market ahead
of being spun out of ServiceMaster. Its business has the reinforcing network effect of a
platform business, and significant market share in a growing market it can grow further, as
it expands beyond its home repair to home maintenance and improvement market
opportunities.
And the risk of disruption from others is low as it has the largest marketplace, which pulls
people and contractors back towards it. On top of that, as more people, particularly
millennials that have low risk tolerances, become first time home buyers, demand for
frontdoor's offering will continue to rise.
Management was also confident in recent calls about their digital strategy and how they
have been able to maintain their offerings for clients through the pandemic, highlighting
the resiliency of the business.
Considering pessimistic market expectations, the company's platform business model and
economic moats, and positive macro tailwinds, there is significant equity upside for FTDR.
Frontdoor is a provider of home service plans in the U.S., and operates under the American Home Shield, HSA, OneGuard and Landmark brands. The company's home service plans help customers protect and maintain their homes, typically their asset, from costly and unplanned breakdowns of essential home systems and appliances. The company's home service plans cover the repair or replacement of main components of household systems and appliances, including electrical, plumbing, central heating, ventilation and air conditioning systems, water heaters, refrigerators, dishwashers and ranges/ovens/cooktops. The company serves customers across various states and the District of Columbia.
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