The Pros and Cons of Investing in American Home Shield
By Q3 2018, it is expected that ServiceMaster Holdings (NYSE: SERV) will complete the spinoff of American Home Shield (AHS). At the time of writing, ServiceMaster Global Holdings Inc. was priced at around $60 per share with a market capitalization of $8.131 billion and a price/earnings ratio of 15.91. The company has a 1-year target estimate price of $63.17 per share. Revenues and earnings have steadily been increasing since 2015.
As one of the premier companies on the New York Stock Exchange, ServiceMaster Holdings – which owns American Home Shield – has seen revenue increase from $2.59 billion in 2015 to $2.75 billion in 2016, and $2.91 billion in 2017. At the same time, earnings have also steadily increased from $160 million in $2015, to $155 million in 2016, and $510 million in 2017. With a successful parent company, it’s interesting to evaluate the expected performance of American Home Shield – a leading provider of home warranty services in the US.
Who is Currently Managing the Operations of American Home Shield?
Indications that the spinoff will be completed in Q3 2018 have been met with plenty of interest by investors. In the run-up to this decision, there has been a push to seek out a qualified CEO for American Home Shield. The current president, Mr. Tim Haynes has taken it upon himself to begin preparations in earnest. The interim president will be Steve Hochhauser, until a permanent CEO is in place. Steve will be stepping in to provide the leadership and management expertise required to run this multimillion dollar company.
As one of the premier providers of residential and commercial services, ServiceMaster Global holdings has a wide network of 8,000+ franchises, company-owned locations, and licensees. Among the many profitable brands are Furniture Medic, Merry Maids, Terminix, and American Home Shield. Regarding American Home Shield’s services, this company provides several different coverage options including a systems plan, an appliance plan, a combo plan and build your own plan. Coverage terms are 1 month at a time, and the service call fee can range between $75 and $125. Clients can expect coverage in the region of $1,500 – $3,000 on their systems and appliances.
The Pros and Cons of Investing in the Spinoff
Once American Home Shield functions as its own entity, investors will have an opportunity to profit off this company’s phenomenal performance. On the plus side, there are many reasons why this should be considered a viable investment opportunity, including:
- American Home Shield dominates the home warranty market in the US. It is one of the most recognizable, credible, and responsive companies. It offers a wide range of home warranty services to clients across states except for Arkansas. It is currently a private company, but it has several other sister companies including Home Security of America, and Landmark Home Warranty. This extensive company has annual revenues of $101 million, and an estimated client base comprising 1.5 million homeowners. It has a B rating on the Better Business Bureau accreditation and has won several awards over the years.
- The Home Warranty Market Is Highly Profitable for many reasons. As such, American Home Shield (AHS) is a viable investment proposition. The way the home warranty market works, like all other insurance companies is through a carefully structured series of plans, premiums and approvals that are guaranteed to benefit the company’s growth prospects. In 2017, the US consumer service contract market indicated that 5.7% of $44.7 billion was paid to home warranty companies. This number is growing all the time. It now outstrips appliances and furniture.
- Constant Innovation in the Home Warranty Market ensures that American Home Shield will always be on the cusp of innovative strategies, products, and services. Growth depends on innovation, and the home warranty market is bang on the money. More coverage options, plans, and perks are now available to homeowners seeking home warranty coverage through AHS. As a case in point, AHS came up with a new product recently with a re-key service for real estate home warranty customers across 18 states. This cost-effective service ensures that homeowners will receive re-key locks on up to 6 doors, with additional services provided too.
- American Home Shield Is on Top of Its Game, and they make great commercials. Their marketing department is top-tier, and their advertising clearly indicates that they have the budget, the wherewithal, and the market penetration to reach increasing numbers of homeowners across the US. This company appears to be going places.
Of course, there are several reasons to be a little hesitant about home warranty companies in general. These may not be applicable to AHS, but they should be borne in mind if you’re thinking of investing in these types of companies:
- There Are Several Shady Operators in the Home Warranty Market. It’s important to conduct thorough research to evaluate which home warranty providers are legitimate, and which are fly-by-night operations. We have established that AHS is a credible operator with years of industry-leading experience. Nonetheless, increasing regulation may put limitations on the profits that these types of companies can enjoy in the future.
- Customer Feedback Is Not Always Positive in the home warranty market. Most customers believe that everyone who submits a claim for a faulty device, or appliance should always be approved. This is unfortunately not the case as there are actuarial computations that home warranty companies must abide by to remain profitable.