Frontdoor (FTDR): A High-Quality Compounder Trading at a Significant Discount to Intrinsic Value

Frontdoor, Inc. (NASDAQ: FTDR), a leader in home warranty and structural protection services, has emerged as one of the most compelling long-term investment opportunities in the market. With a robust business model, expanding margins, and a disciplined capital allocation strategy, the company is trading at a significant discount to its intrinsic value—offering a compelling margin of safety for patient investors.

Strong Fundamentals: A Recipe for Compounding

Frontdoor's second-quarter 2025 results underscore its operational excellence. Revenue surged 14% year-over-year to $617 million, driven by the successful integration of the 2-10 Home Buyers Warranty acquisition and strategic price adjustments. Gross profit margins expanded by 130 basis points to a record 58%, while net income grew 21% to $111 million. Adjusted EBITDA hit $199 million, up 26%, reflecting the company's ability to convert top-line growth into profitability.

The company's free cash flow generation is equally impressive. For the first half of 2025, free cash flow reached $237 million—a 44% increase year-over-year. This cash flow is being reinvested wisely: capital expenditures are capped at $35 million for the year, and the company has accelerated its share repurchase program, targeting $250 million in buybacks. With $506 million in cash and equivalents on its balance sheet and a manageable debt load of $1.164 billion, Frontdoor is well-positioned to fund growth while maintaining financial flexibility.

Discounted Cash Flow Analysis: A Clear Case of Undervaluation

Using a discounted cash flow (DCF) model, Frontdoor's intrinsic value becomes evident. The company's full-year 2025 guidance—$2.055 billion to $2.075 billion in revenue and $530 million to $550 million in Adjusted EBITDA—provides a solid foundation for projections. Assuming a conservative 5% annual growth rate in free cash flow beyond 2025 and a weighted average cost of capital (WACC) of 13.70%, the intrinsic value per share exceeds $75—a 35% premium to its current price of $56.16 as of August 5, 2025.

The margin of safety is further amplified by the company's recent stock price volatility. On August 5, 2025, FTDR closed at $56.16 after a sharp intraday drop from $64.91 to $50.75. While short-term volatility can unsettle investors, this dislocation presents an opportunity to buy a high-quality business at a discount. The company's strong balance sheet, with $377 million in unrestricted cash, provides a buffer against economic headwinds and supports its aggressive buyback program.

Valuation Dislocation: A Buying Opportunity

Frontdoor's valuation appears disconnected from its fundamentals. At a price-to-free cash flow (P/FCF) ratio of just 2.4x (based on $237 million in H1 2025 FCF), the stock is trading at a fraction of its historical average. For context, peers in the home services sector trade at 6-8x P/FCF. Even more compelling is the company's price-to-EBITDA ratio of 10.5x, well below the sector average of 14x.

The disconnect stems from market skepticism about the home warranty sector's growth potential. However, Frontdoor's diversified revenue streams—renewal, real estate, direct-to-consumer, and new programs like HVAC and Moen—demonstrate resilience. Renewal revenue grew 9% in Q2, while real estate revenue surged 21%, highlighting the company's ability to capitalize on housing market dynamics.

Investment Thesis: Buy and Hold for the Long Term

Frontdoor's business model is a textbook example of a high-quality compounder. It generates consistent cash flow, reinvests prudently, and returns capital to shareholders through buybacks. With a WACC of 13.70%, the company must deliver returns that exceed this hurdle rate to create value. Its current free cash flow yield of 4.2% (based on $237 million in H1 2025 FCF and a market cap of $10.1 billion) suggests it already meets this criterion.

For long-term investors, the key risks include economic downturns that could reduce home sales or appliance purchases. However, Frontdoor's recurring revenue model—70% of which comes from renewal contracts—provides stability. Additionally, its $250 million share repurchase target ensures that even in a slow-growth environment, earnings per share will be bolstered by a shrinking share count.

Conclusion: A Compelling Case for Accumulation

Frontdoor is a rare combination of strong fundamentals, disciplined capital allocation, and an attractive valuation. The recent price dislocation offers a rare entry point for investors willing to think long-term. With a DCF-derived intrinsic value of $75+ per share and a robust balance sheet, FTDR is a buy for those seeking a high-quality compounder with a margin of safety.

In a market obsessed with short-term noise, Frontdoor's focus on durable cash flow and shareholder returns is a breath of fresh air. For investors with a five- to ten-year horizon, this is a name worth watching—and accumulating.