Over the past six months, Frontdoor’s shares (currently trading at $59.44) have posted a disappointing 9.6% loss, well below the S&P 500’s 3.1% gain. This might have investors contemplating their next move.
Is there a buying opportunity in Frontdoor, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think Frontdoor Will Underperform?
Despite the more favorable entry price, we're sitting this one out for now. Here are three reasons we avoid FTDR and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
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 weak 7.3% compounded annual growth rate over the last five years. This fell short of our benchmark for the consumer discretionary sector.
2. Free Cash Flow Projections Disappoint
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.
Over the next year, analysts’ consensus estimates show they’re expecting Frontdoor’s free cash flow margin of 18.6% for the last 12 months to remain the same.
3. New Investments Bear Fruit as ROIC Jumps
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
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 1.7 percentage point increases each year over the last few years. This is a good sign, and we hope the company can keep improving.
Final Judgment
We see the value of companies helping consumers, but in the case of Frontdoor, we’re out. Following the recent decline, the stock trades at 13× forward P/E (or $59.44 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are more exciting stocks to buy at the moment. We’d suggest looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
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