ServiceMaster (NYSE:TMX) just spun off Frontdoor (NASDAQ:FTDR), and the newly public company should prove interesting to investors. The stock began trading on Oct. 1, and it's already had a bumpy history, rising to nearly $50 per share before dropping to less than $40 in the mid-October meltdown. The company sports a market cap of $3.4 billion, and ServiceMaster retains almost 20% of the stock.

Who is Frontdoor? The company provides home-service plans through a subscription, allowing homeowners to make a convenient monthly payment and receive maintenance and repairs for their appliances, plumbing, and electrical systems whenever they need it. Frontdoor is the company behind the American Home Shield brand, the largest brand in the sector by revenue.

A house stencil amid rulers and home maintenance tools on top of a desk.


Here are three things investors should know about Frontdoor.

Frontdoor is the leader in the industry

Frontdoor created the industry way back in 1971, and it's now the leader, counting some 2 million customers and growing. It scales across the United States and provides services via a network of more than 15,000 independent contracting firms. It's more than four times the size of its next largest competitor and owns about 46% of the market, while the next largest rivals control 11% and 9%. The remainder of the market is fragmented.

While the company is currently focused on subscription services covering major appliances, plumbing, and electrical systems, management is pushing toward more services that ease the burden of homeownership. The company is testing or rolling out TV mounting, carpet cleaning, HVAC filter subscriptions, and handyman services, among others. It's also contemplating a move into painting, smart-home installation, landscaping, and home inspections.

Fewer than 4% of homes have a service plan today, and management expects that figure to grow as it spreads awareness of its services.

Customers and service providers can benefit

So what's the value proposition for those who do business with Frontdoor? Service providers benefit by gaining a steady stream of clients who are funneled to their door. It's important to note that these clients are not merely leads but actual paying clients who need immediate service. These providers will sacrifice some gross margin in order for the stream of business, and the larger Frontdoor grows, the more business providers may be able to capture.

For customers, the main benefit is having a prescreened and highly rated repair-person to get your ailing system in working order quickly without having to do the research and legwork yourself. Typically, service packages run from $25 a month up to $50, depending on what you want covered and the level of co-pay that you'll pay for each service call. These co-pays cost either $75, $100, or $125, depending on the plan, and the average customer makes about two service calls per year. Consumers renew at an average 75% rate, so Frontdoor is satisfying a significant percentage of its clientele.

Frontdoor has an attractive business model

As a connector between service providers and customers, Frontdoor runs a relatively capital-light ship, meaning it spends very little on fixed expenses. In fact, its usual outlay on capital expenditures is about 2% of its annual revenue. Moreover, the company has total assets of approximately $600 million (including about $1 billion in debt), so it's running tremendously light, especially for a market cap of $3.4 billion.

Frontdoor's sales growth moving higher over the last 10 years.


This model coupled with strong revenue growth has led to attractive margins. Since 2013, sales have soared 11.8% annually, and this year sales are up nearly 9%. Earnings before interest, taxes, depreciation, and amortization margins have been tracking a very solid 22% over the last four years, though they'll drop this year due to increased contract claims.

And longer term? Management is projecting sales to grow in the high single digits on an organic basis, with adjusted EBITDA margin returning to the low 20s. Those are all attractive traits.

Is Frontdoor a buy?

Frontdoor certainly does look interesting, and the price doesn't look too expensive, though 2018 will be rougher than 2017, when the company earned $160 million (but included $20 million in restructuring expenses for the spinoff). At today's price, the stock carries a P/E of over 21 on a trailing basis, not obviously cheap, but still a reasonable price for the growth Frontdoor is likely to see, as well as the capital-light business model and leading positions.

That potential upside is likely why ServiceMaster continues to own nearly 20% of the stock, waiting for a better price to unload its stake, a move that could temporarily depress Frontdoor when it happens. So ServiceMaster is looking to take advantage of spinoff dynamics, and spinoffs are one of the most interesting corners of the market because of the possibility of finding unknown and mispriced companies before they attract wider attention.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.