Morgan Stanley Takes Neutral Stance On ServiceMaster After Frontdoor Spinoff

Servicemaster Global Holdings Inc SERV recently completed its spinoff of Frontdoor Inc. as it focuses on delivering an array of residential and commercial services.

The Analyst

Morgan Stanley analyst Toni Kaplan downgraded ServiceMaster from Overweight to Equal-weight and lowered the price target from $61 to $42.

The Thesis

Following the spin-off, the valuation of ServiceMaster seems fair, given that the stock has rerated significantly since the announcement, Kaplan said in a Tuesday downgrade note. (See the analyst's track record here.)

Between the announcement of the spinoff and the closing, ServiceMaster shares gained about 45 percent. 

Morgan Stanley updated its ServiceMaster model to reflect only the Terminix and Franchise Services Group segments. Using the discounted cash flow method, Kaplan valued the shares at $41, with the sum-of-the-parts yielding a stock value of $44.

With the updated price target of $42 suggesting merely 3-percent upside to Monday's closing price, Morgan Stanley saw fit to move to the sidelines.

The firm expects Terminix growth to be the stock's key driver. 

"Our operational metrics remain unchanged, but we update our interest expense after a debt exchange resulted in the paydown of $1 billion of SERV's term loan facility from the $1 billion of debt issued by FTDR."

The Price Action

ServiceMaster shares have added about 19 percent year-to-date.

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Photo courtesy of ServiceMaster.