ServiceMaster Uncovers The Beauty In Pests, Disasters

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P est control services and home warranty plans may not be flashy businesses, but they've sure been lucrative for ServiceMaster Global Holdings.

ServiceMaster ( SERV ) is a top provider of essential residential and commercial services via a service network of more than 8,000 company-owned, franchised and licensed locations. The company boasts a portfolio of well-known service brands such as American Home Shield home warranties, Terminix termite and pest control, and ServiceMaster Restore disaster restoration.

ServiceMaster went public in June 2014 and has been on a winning streak since. Its profits have surged by double digits, and its stock has taken off like a rocket, soaring 125% since its IPO. Year to date, shares are up 43%.

"Since the IPO, the company has had better-than-expected earnings per share," Robert W. Baird & Co. analyst Andrew Wittmann told IBD. "Margins came out higher than the Street expected because it had more operating leverage. That's the first key reason for the stock's outperformance."

Digital Marketing

ServiceMaster is benefiting from a number of internal efforts, including a digital marketing/social media strategy that's making it easier and more convenient for customers to find the company online, make purchases and remain customers. It also enjoys a strong position in its markets and boasts a value proposition and business model that differentiates it from online players and others, the company says.

Further, the company says that it has made inroads on the digital marketing/social media front.

"The core capabilities of the business have always been in marketing and sales," Chief Executive Rob Gillette told IBD. "We're very good at executing our primary strategy to acquire new customers. That's a core competency. More and more, because of our digital marketing efforts and social media, we're getting better at the ability to sell and market."

The company's core competency hasn't changed, but it's evolving, he adds. Mark Barry, ServiceMaster's chief marketing and strategy officer, agrees.

"In the last couple of years, we've improved our ability to interact with customers via social media," said Barry, who had been president of American Home Shield prior to being named to his current post this year. "At American Home Shield, we developed good skills in e-commerce and getting customers to buy (our services) online. We're working at improving our ability to work with customers online from a service standpoint, and we're trying to build out our capability to manage their experience online."

ServiceMaster uses the term "ServSmart" to describe American Home Shield's strategic approach to digital marketing and online sales and service. ServSmart incorporates online sales and service -- including chat and social media -- plus sales and service mobility in that it's smartphone- and tablet-enabled.

Top Share

The company says that its Terminix unit shares the top market share spot for termite and pest control services in the U.S. withRollins ( ROL ), which owns the Orkin pest control brand, among others. Terminix offers an "Ultimate Protection" guarantee for residential customers, which the company says is the strongest in the business.

ServiceMaster's American Home Shield unit is the No. 1 home warranty company in the U.S. Through their home warranties, American Home Shield and its subsidiary HSA Home Warranty -- acquired in 2014 -- provide residential customers with service contracts to repair or replace electrical, plumbing, heating and air conditioning systems or components, and other major appliances. Pre-screened independent contractors service these contracts. American Home Shield has a network of 11,000 contractors and 45,000 technicians.

Home Shield Growth

Gillette says that a lot of the company's growth has come from American Home Shield. In the third quarter, companywide adjusted earnings rose 17% from a year earlier to 54 cents a share. Revenue grew 6% to $706 million. Analysts polled by Thomson Reuters expect ServiceMaster's full-year revenue to rise 20% from a year earlier to $1.77 a share. They see a 14% gain in 2016 and an 11% increase in 2017.

Breaking it down, American Home Shield revenue grew 12%, while Terminix revenue grew 5%. In the third quarter, new customer acquisitions for American Home Shield were up 21% from a year earlier, says Barry. Traditionally, home warranties are sold during real estate transactions. But now an increasing number of customers are buying home warranties online directly from American Home Shield.

Barry says that American Home Shield makes it more convenient for consumers to buy home warranty plans.

"We find the contractors and manage their performance," he said. On average, a home warranty contract costs around $575 a year, and most consumers are billed monthly.

Strong Position

In general, analyst Wittman says, ServiceMaster benefits from its strong position in the pest control and home warranty markets.

"On the pest control side, what differentiates Terminix and Orkin is Terminix is a well-known national brand, and ServiceMaster can invest more in marketing and advertising on a national scale -- and spread it out over a larger base and get good returns on its investment," he said.

American Home Shield is the "clear scale leader" in the business, says Wittman. American Home Shield differs from other players in the home warranty market because of its scale, with a much larger base of technicians to call on customers in many markets, he adds.

"One of the key value propositions American Home Shield brings to consumers is it's able to lower repair costs for them by using volume discounts," Wittmann said. That scale also comes in handy when the company negotiates volume discounts with vendors and technician service providers, he adds.

"If American Home Shield can lower the cost of repair, it creates value for the customer," he adds.

In most cases, ServiceMaster's business is a recurring revenue model where customers typically renew their contracts on an annual basis. That model enables the company to have a more predictable revenue stream.

ServiceMaster is part of IBD's Building-Maintenance & Service industry group. It has an IBD Composite Rating of 90 out of a possible 99. Rollins is also a member of the group.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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