SERV

Publicly traded companies mentioned herein: First American Financial Corp (FAF), Rollins Inc (ROL), Sears Holdings Corp (SHLD), Servicemaster Global Holdings (SERV), Whirlpool Corp (WHR)

Highlights

The presenter is short shares of Servicemaster (SERV) and characterized it as “a great alpha short”. The stock is down ~13% year-to-date and recently sold-off ~9% in mid-September on a Street downgrade. He intends to remain short, but suggested that investors look for a better entry point (i.e., in the mid-to-high $30s) to establish a position. Generally speaking, he explained that the market seems to believe SERV runs a “recurring revenue - free cash flow - staple-sort of a business”. It is probably best known for Terminix, its pest control segment, but American Home Shield (AHS) – SERV’s home warranty business – is the potential catalyst for further declines in the share price. Essentially, home warranties are not critical to have, and there is a maximum price point consumers are willing to pay. If the presenter’s thesis is accurate, SERV is maxed out on pricing for home warranties and is likely to see increasing costs due to higher call/ service volume as a result of its direct to consumer (DTC) marketing efforts. Additionally, Terminix faces some unique challenges following the departure of its president, and this should help limit any material upside for the stock over time. Having said that, SERV shares could rebound from current levels following a sharp drop, and it is hard to make a case for less than $2 per share of EPS in 2016 or 2017; however, given the structural challenges SERV’s businesses face, he thinks the stock is “a multi-year” short and it could decline into the $20s longer-term.