Investor Alert

Oct. 4, 2018, 8:55 a.m. EDT

This company wants to take the sweat out of home repair

Wall Street has already noticed — Frontdoor has the reach to sell more home warranties and ease the connection with repair professionals

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By Andrea Riquier

Frontdoor is one of a new crop of companies trying to bring national scale and 21st-century technology to one of the most local and reactive of industries: home warranties.

When pipes burst on a chilly December morning, or a roof springs a leak in the middle of a downpour, it’s stressful, expensive and sometimes actually dangerous.

Some of the pain could be soothed with a home warranty covering surprise repairs. Yet only a surprising 4% of households shell out for that peace of mind. Tech-driven Frontdoor Inc. /zigman2/quotes/202976892/composite FTDR -1.96%   thinks it can change that market, and Wall Street is convinced, too.

Frontdoor is already the parent of the American Home Shield company, which has been selling warranties for decades, but analysts think Frontdoor, spun off from ServiceMaster and trading on its own beginning Monday, stands to bring to home repair, especially on-demand repair, what Lyft and Uber bring to hitching a ride.

Its CEO, Rex Tibbens, is in fact the former COO of Lyft and one of the early directors of Amazon’s /zigman2/quotes/210331248/composite AMZN +0.90%   Prime Now delivery service.

Frontdoor “is at the start of an accelerated growth period, we believe,” Oppenheimer analysts wrote in a note initiating coverage of the shares.

“The core warranty business already grows high-single-digits; expansion into new services should be incremental (HVAC tune-up, carpet cleaning, utility line protection, etc), as should a potential partnership with a utility or large home center. The blue-sky scenario comes from Tibben’s intentions to create the Lyft of home services, which connects ‘on-demand’ users with [Frontdoor’s] unique network of 15,000 contractors.”

Oppenheimer rated the company’s stock “outperform” and gave it a 12-18 month price target of $48, which represents 11% upside from Wednesday trading levels.

Compass Point analyst Chris Gamaitoni was even more bullish, giving the stock a price target of $51.75.

Gamaitoni is watching to see whether frontdoor will create a “marketplace” similar to the one run by Angie’s List parent ANGI HomeServices Inc. /zigman2/quotes/209149959/composite ANGI +2.59%  , offering a remodeling and repair provider review platform and other features.

Also see: This is why analysts are through the roof on ANGI Homeservices

Such a transition would be “far from guaranteed, comes with risk, but can become a ‘game-changer’ for the company considering it has significant experience in the hardest part of the business (contractor management) and can spend more in a year from free cash flow than many of the non-HomeAdvisor peers,” Gamaitoni wrote of Frontdoor. But that’s a longer-term consideration, he noted.

Whether or not the company pivots to a marketplace model, it is launching at a sweet spot in the macro housing cycle.

Barely 4% of U.S. homes have a service plan, the Oppenheimer analysts wrote, and Frontdoor thinks it’s the one to increase that penetration. Frontdoor already commands the largest customer base in the warranty space, nearly 50% of what Oppenheimer calls a $2 billion market. What’s more, the company is increasing the number of warranty-holder renewals, the analysts noted.

Among other considerations, take-up of warranties has mostly been concentrated in the “smile states,” along the bottom of the country and up each coast a bit. That may be because those are the markets in which new construction is most prevalent, and service plans offer homeowners a way to compete when they sell.

Also see: Why aren’t there enough houses to buy?

Meanwhile, demand for homes remains strong, and new construction is hitting the market slowly. In many cases, supply of previously-owned homes in good shape is snatched up immediately, leaving older homes that are more in need of repair left.

One of Frontdoor’s particular strengths, Gamaitoni wrote, is that the demographics of its customer base mirror that of the overall homeowner population. It is “more skewed to” homes over $100,000 in value and customers under 65 years old.

“The similarity between its customer base in the direct-to-consumer channel and overall demographics of the housing market increases our confidence that this is a mass-market product and not limited to a narrow customer segment,” he said.

And baby boomers are increasingly “aging in place,” which will also represent increased demand for repairs — and the professional connections and budget management that they require.

Read: Get ready: home remodeling is set to surge at the fastest pace in more than a decade

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Andrea Riquier reports on housing and banking from MarketWatch's New York newsroom. Follow her on Twitter @ARiquier.

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