Frontdoor (FTDR)

Home warranty company Frontdoor (NASDAQ:FTDR) reported Q1 CY2025 results topping the market’s revenue expectations, with sales up 12.7% year on year to $426 million. Guidance for next quarter’s revenue was better than expected at $602.5 million at the midpoint, 1.7% above analysts’ estimates. Its non-GAAP profit of $0.64 per share was 69.5% 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. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Regrettably, Frontdoor’s sales grew at a sluggish 6.4% 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 6.2% 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 12.7%, and its $426 million of revenue exceeded Wall Street’s estimates by 2.1%. Company management is currently guiding for a 11.2% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 8.3% over the next 12 months. Although this projection indicates its newer products and services will fuel better top-line performance, it is still below average for the sector.

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 has been trending up over the last 12 months and averaged 19.1% over the last two years. On top of that, its profitability was top-notch for a consumer discretionary business, showing it’s an well-run company with an efficient cost structure.

In Q1, Frontdoor generated an operating profit margin of 35.4%, up 22 percentage points year on year. This increase was a welcome development and shows it was more efficient.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Frontdoor’s EPS grew at a solid 13.2% compounded annual growth rate over the last five years, higher than its 6.4% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

In Q1, Frontdoor reported EPS at $0.64, up from $0.44 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Frontdoor’s full-year EPS of $3.57 to shrink by 14.4%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Frontdoor has shown decent cash profitability, giving it some flexibility to reinvest or return capital to investors. The company’s free cash flow margin averaged 12.7% over the last two years, slightly better than the broader consumer discretionary sector.

Frontdoor’s free cash flow clocked in at $117 million in Q1, equivalent to a 27.5% margin. This result was good as its margin was 8.2 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 trump fluctuations.

Over the next year, analysts predict Frontdoor’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 14.5% for the last 12 months will decrease to 12.8%.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared 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 45.2%, 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. Fortunately, Frontdoor’s ROIC averaged 4.3 percentage point increases over the last few years. This is a good sign, and if its returns keep rising, there’s a chance it could evolve into an investable business.

Frontdoor reported $506 million of cash and $1.19 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 $472 million of EBITDA over the last 12 months, we view Frontdoor’s 1.5× net-debt-to-EBITDA ratio as safe. We also see its $3 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.

This was a beat and raise quarter. We were impressed that the company raised full-year revenue guidance and also by Frontdoor’s optimistic EBITDA guidance for next quarter, which blew past analysts’ expectations. We were also excited its EPS outperformed Wall Street’s estimates by a wide margin. Zooming out, we think this was a good print with some key areas of upside. The stock traded up 16.3% to $47.78 immediately after reporting.

Updated: July 10, 2025 at 10:08 PM EDT

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

Frontdoor’s business quality ultimately falls short of our standards. For starters, its revenue growth was weak over the last five years. And while its stellar ROIC suggests it has been a well-run company historically, the downside is its number of home service plans has disappointed. On top of that, its Forecasted free cash flow margin suggests the company will ramp up its investments next year.

Frontdoor’s P/E ratio based on the next 12 months is 19.1x. Beauty is in the eye of the beholder, but our analysis shows the upside isn’t great compared to the potential downside. We're fairly confident there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $55.50 on the company (compared to the current share price of $58.38).