Frontdoor (FTDR)

Home warranty company Frontdoor (NASDAQ:FTDR) reported Q3 CY2025 results exceeding the market’s revenue expectations, with sales up 14.4% year on year to $618 million. Guidance for next quarter’s revenue was better than expected at $420 million at the midpoint, 0.6% above analysts’ estimates. Its non-GAAP profit of $1.58 per share was 4.6% above analysts’ consensus estimates.

Company Overview

Established in 2018 as a spin-off from ServiceMaster Global Holdings, Frontdoor (NASDAQ:FTDR) is a provider of home warranty and service plans.

Some consumer discretionary companies don’t fall neatly into a category because their products or services are unique. Although their offerings may be niche, these companies have often found more efficient or technology-enabled ways of doing or selling something that has existed for a while. Technology can be a double-edged sword, though, as it may lower the barriers to entry for new competitors and allow them to do serve customers better.

Frontdoor's primary competitors include HomeServe (owned by Brookfield Infrastructure NYSE:BIP), The ServiceMaster (NYSE:SERV), Assurant (NYSE:AIZ), and private companies American Residential Warranty, Choice Home Warranty, and Cinch Home Services.

A company’s long-term sales performance can indicate its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Regrettably, Frontdoor’s sales grew at a sluggish 7.1% compounded annual growth rate over the last five years. This fell short of our benchmark for the consumer discretionary sector and is a tough starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within consumer discretionary, a stretched historical view may miss a company riding a successful new product or trend. Frontdoor’s annualized revenue growth of 8% over the last two years aligns with its five-year trend, suggesting its demand was consistently weak.

This quarter, Frontdoor reported year-on-year revenue growth of 14.4%, and its $618 million of revenue exceeded Wall Street’s estimates by 1.1%. Company management is currently guiding for a 9.7% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 6.2% over the next 12 months, a slight deceleration versus the last two years. This projection doesn't excite us and indicates its products and services will face some demand challenges.

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Frontdoor’s operating margin might fluctuated slightly over the last 12 months but has generally stayed the same, averaging 18.5% over the last two years. This profitability was top-notch for a consumer discretionary business, showing it’s an well-run company with an efficient cost structure.

In Q3, Frontdoor generated an operating margin profit margin of 23%, down 2.8 percentage points year on year. This contraction shows it was less efficient because its expenses grew faster than its revenue.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Frontdoor’s EPS grew at a remarkable 19% compounded annual growth rate over the last five years, higher than its 7.1% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

In Q3, Frontdoor reported adjusted EPS of $1.58, up from $1.38 in the same quarter last year. This print beat analysts’ estimates by 4.6%. Over the next 12 months, Wall Street expects Frontdoor’s full-year EPS of $4.08 to grow 3%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Frontdoor has shown impressive cash profitability, giving it the option to reinvest or return capital to investors. The company’s free cash flow margin averaged 15% over the last two years, better than the broader consumer discretionary sector.

Frontdoor’s free cash flow clocked in at $58 million in Q3, equivalent to a 9.4% margin. This result was good as its margin was 6.4 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, leading to temporary swings. Long-term trends carry greater meaning.

Over the next year, analysts predict Frontdoor’s cash conversion will slightly fall. Their consensus estimates imply its free cash flow margin of 16.9% for the last 12 months will decrease to 15.9%.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Although Frontdoor hasn’t been the highest-quality company lately because of its poor top-line performance, it found a few growth initiatives in the past that worked out wonderfully. Its five-year average ROIC was 43.7%, splendid for a consumer discretionary business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Frontdoor’s ROIC has increased. This is a good sign, and if its returns keep rising, there’s a chance it could evolve into an investable business.

Frontdoor reported $563 million of cash and $1.2 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $543 million of EBITDA over the last 12 months, we view Frontdoor’s 1.2× net-debt-to-EBITDA ratio as safe. We also see its $21 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was encouraging to see Frontdoor beat analysts’ EBITDA expectations this quarter. We were also glad its EPS outperformed Wall Street’s estimates. On the other hand, its EBITDA guidance for next quarter missed. Overall, this print had some key positives. The stock remained flat at $65.74 immediately following the results.

Updated: December 4, 2025 at 9:03 PM EST

Before making an investment decision, investors should account for Frontdoor’s business fundamentals and valuation in addition to what happened in the latest quarter.

We see the value of companies helping consumers, but in the case of Frontdoor, we’re out. To begin with, its revenue growth was weak over the last five years, and analysts don’t see anything changing over the next 12 months. And while its above-average ROIC suggests its management team has made good investment decisions, the downside is its number of home service plans has disappointed. On top of that, its Forecasted free cash flow margin for next year suggests the company will fail to improve its cash conversion.

Frontdoor’s P/E ratio based on the next 12 months is 12.2x. This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $59.33 on the company (compared to the current share price of $53.17).