On Wednesday, KeyBanc maintained its Sector Weight rating on NASDAQ:FTDR, the parent company of Frontdoor Inc., following the acquisition of home warranty service provider 2-10 Home Buyers Warranty (2-10 HBW). The acquisition is seen as a strategic move that diversifies Frontdoor's customer base and offers new market exposure, particularly in new home sales.
The analyst from KeyBanc highlighted the potential benefits of the acquisition, such as the opportunity for Frontdoor to introduce its core home service warranty products to a new channel. This move could also enable cross-selling of the company's on-demand services. KeyBanc anticipates that 2-10 HBW will contribute to double-digit growth in both customer base and revenue for Frontdoor in the year 2025 and will have a positive impact on EBITDA margins.
Despite the positive outlook on the acquisition's strategic fit, KeyBanc expressed concerns about the broader challenges in the real estate market, including a predicted mid-single-digit decline in home service units in 2024 due to a challenging real estate environment and inflationary pressures. Moreover, the firm noted that it is still early to assess the impact of the American Home Shield brand relaunch.
The Sector Weight rating indicates that KeyBanc advises investors that Frontdoor's stock is expected to perform in line with the average returns of the companies analyzed by the firm within the sector. The analyst's comments suggest that while the acquisition of 2-10 HBW presents opportunities for Frontdoor, prevailing market conditions and other factors contribute to the decision to maintain the current rating without an upgrade.
In other recent news, Frontdoor, Inc. announced its acquisition of 2-10 Home Buyers Warranty, a structural warranty protection provider, for $585 million. This cash transaction is expected to close in the fourth quarter of 2024, pending regulatory approval.
The move is anticipated to expand Frontdoor's customer base and open a new sales channel in the home warranty market. 2-10 Home Buyers Warranty, known for its strong customer retention rate, generated $198 million in revenue and $43 million in Adjusted EBITDA in 2023.
In financial performance, Frontdoor reported a robust first quarter for 2024, where revenue increased by 3% to $378 million and adjusted EBITDA rose by 33% to $71 million. For the second quarter, the company forecasts revenue to be between $530 million and $540 million, with adjusted EBITDA ranging from $130 million to $140 million. For the full year, Frontdoor anticipates revenue between $1.81 billion and $1.84 billion, and adjusted EBITDA between $360 million and $370 million.
Despite a challenging real estate market causing a decline in demand, Frontdoor is addressing these issues with a brand relaunch and customer service enhancements. The company is also expanding into additional on-demand services to drive revenue growth and is seeing success in its new HVAC sales program. These are all recent developments demonstrating Frontdoor's resilience and adaptability amidst industry challenges.
InvestingPro Insights
Frontdoor Inc. (NASDAQ:FTDR) is navigating the real estate market's ebbs and flows with strategic moves like the recent acquisition of 2-10 Home Buyers Warranty. KeyBanc's analysis underscores the potential for growth and synergies, and InvestingPro data aligns with this perspective.
Frontdoor's market cap stands at a robust $2.88 billion, and its P/E ratio of 16.02 reflects a balance between value and growth potential. Notably, the company's Price / Book ratio for the last twelve months as of Q1 2024 is high at 17.81, suggesting a market premium for its assets.
InvestingPro Tips further reveal that Frontdoor has a perfect Piotroski Score of 9, indicating strong financial health. Moreover, the company's management has been actively buying back shares, a sign of confidence in the firm's future. With 4 analysts revising their earnings upwards for the upcoming period and a prediction of profitability this year, Frontdoor appears poised for positive momentum. Moreover, the stock has enjoyed a strong return over the last three months, up 21.39%, indicating investor optimism.
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