JELD-WEN Holding: Opening Doors For Upside Opportunity

seekingalpha05-21

JELD is a manufacturer and distributor of doors, windows, and other building items in the Construction and Repair & Remodel industry.The company has experienced lackluster revenue growth in the US and...

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(NYSE:JELD) is in the Construction and Repair & Remodel [R&R] industry. They manufacture and distribute high-quality interior and exterior doors, windows, and other related building items. Its revenue growth in the United States and Europe has been somewhat lackluster, which is understandable given the slow housing market and high-interest rate climate. The housing market is showing mixed signs of improvement in 2024, but there has been significant growth in single-family housing starts. In my relative valuation model, it has underperformed against its peers in terms of revenue growth outlook and profitability margins. However, JELD has been scaling up investment in projects designed to improve operational efficiency and margins. Given these factors, I'm giving it a 'buy' rating, as JELD can offer promising upside as we move forward. Historical Financial Analysis   Author's Chart JELD has shown volatile top-line growth in the past few years. Net revenue was down ~-5% in 2023 to $4,304 million, relative to $4,543 million in 2022. This decline was primarily caused by a 5% decline in core revenue, influenced by a 10% decrease in volume/mix, which was partially offset by a 5% increase in price realization. In 2022, it has experienced strong revenue growth from strong price realization driven by cost inflation.   Author's Chart Moving onto profitability, JELD’s margins have improved compared to the prior year. Despite a decrease in net revenue, gross profit has improved by $46.7 million. As a percentage of net revenue, gross margin stood at 19.3% in 2023, higher than in 2022, which stood at 17.3%. This increase was driven by favorable price/cost. Adjusted EBITDA from continuing operations has increased by 9%, from $380.4 million to $348 million. This improvement is driven by favorable price/cost and operating cost reductions, which were partially offset by weaker volumes. First Quarter 2024 Earnings Analysis Net revenue in 1Q24 has fallen by 11.2% year-over-year, from $1,080 million to $959 million. Weakened market demand in both North America and Europe led to a decrease in volume/mix, which led to a -12% decline in core revenue. Adjusted EBITDA has fallen by 13% from $79 million to $68 million. However, the adjusted EBITDA margin has been resilient at 7.2%, a small decline of 0.1% from the prior year. This was due to productivity improvements despite the weak volume/mix headwinds. Despite the economic headwinds, capital expenditure has increased by $11.1 million to $34.7 million. JELD is scaling up investment in cost-reduction projects, with a goal for $100 million cost saving this year. Currently, with 300 projects completed, they have more than 700 active projects underway, indicating a robust pipeline of initiatives aimed at further enhancing the firm's operational efficiency. Management has indicated confidence in achieving $100 million in benefits; therefore, we should be able to see margin expansion in the next few quarters. Revenue Segment JELD is a leading global producer of interior and exterior doors with multiple brands worldwide, such as LaCantina and VPI in North America and Swedoor, DANA, and Kellpex in Europe. It has ~84 manufacturing and distribution locations across 15 countries, primarily in North America and Europe, with sales across 71 countries. In North America, JELD’s competition lies in the new construction and R&R industry for residential doors and windows. JELD’s sales are largely influenced by housing starts, construction and repair & remodel activity.   10-K Mixed Signs in Construction Activity in the U.S. Management is expecting single-family construction to be up in the low single digit, while its R&R construction to be down mid to high single digits. If we were to look at housing starts data according to the Census Bureau, there is a significant rising trend in single-family housing starts. As of April 2024, single-family housing starts had risen by 17.7% year-over-year. On the other hand, multifamily housing starts declined by -32.9%. This results in a minimal decrease in total housing starts by -0.6% year-over-year. We can look at housing permits as a proxy for future construction activity. Seasonally adjusted single-family housing permits have increased by 11.4% year-over-year, reflecting a ramp up in future construction activity that could drive demand for JELD’s doors and windows with more single-housing units authorized for construction.   Census Bureau The NAHB Housing Market Index is a key indicator that measures US housing market health, focusing on single-family housing, which is the dominant form of residential housing in the U.S. and accounts for a larger share of the market. If the index is above 50, it indicates a favorable outlook towards housing sales; anything below would be a negative outlook. The index reached 45 in May, which is the first drop in builder confidence since November 2023. It has been steadily increasing since November 2023 till April, hitting the 50s in March and April. This drop in May is likely due to a lack of progress on inflation control, which has led to delays in interest rate cuts. However, as high financing costs continue to drag and weigh on homeowners’ confidence, homeowners with low-interest mortgages are reluctant to move out. This “lock-in effect” could result in fewer existing homes for sale on the market. Low inventory creates a unique opportunity for builders to ramp up new housing starts, which would stimulate demand for JELD’s building products.   Trading Economics ECB to Cut its Historically High Policy Rate in June This case would be similar in Europe, where rising mortgage rates and financing costs have been hammering the housing market. The construction industry has struggled with rising building costs, resulting in fewer construction permits. The current HCOB Eurozone Construction PMI is at 41.9, with a score above 50 indicating an expansion and a score below 50 indicating a contraction. These construction contractions and expansions are based on the housing, commercial activity, and civil engineering categories. Housing has reported the sharpest decline in construction activity, followed by commercial activity. On the brighter side, the ECB has been sending signals to begin cutting rates in June, as long as inflation continues to gradually decline as anticipated. This would provide some relief to the housing market, bringing recovery to JELD’s residential construction and commercial projects in Europe.   S&P Global Closure of Facilities to Streamline Operations In response to the challenging headwinds and demand environment, JELD has shut down two of its window manufacturing facilities in April 2024. One of the facilities is in Vista, California, and it manufactures composite windows under the brand Auraline. JELD is exiting the Auraline Window product as it was not achieving the desired business plan and experienced a sharp input cost increase. This closure is expected to incur $21 million of one-time costs and generate at least $4 million in annual EBITDA savings. The second closure, in Hawkins, Wisconsin, manufactures wood windows. JELD will be consolidating these productions into their other facility in Illinois. Overall, the firm expects to incur ~$45 million in one-time costs associated with the closures and deliver ~$11 million in annual EBITDA savings. Management has commented that these closures would help to streamline operations and allow them to focus on quality of sales and asset utilization. Relative Valuation Model JELD operates in a highly competitive new construction and R&R market. These peers that I have listed in my valuation model also operate in the same industry, which I will be comparing JELD against with their profitability and revenue outlook. Looking at its growth outlook, JELD has underperformed among its peers, with a forward revenue growth outlook of -6.84%. However, this industry in general has a weak outlook, as its peers are reporting negative or low forward growth as well. In terms of profitability margins, JELD has underperformed its peers in both EBITDA margin TTM and Net Income Margin TTM. JELD has the lowest EBITDA margin of 6.29% and a 0.47% net income margin, leaving a wide gap from its peers’ median of 19.39% and 8.87%, respectively. Currently, JELD is trading at a P/E ratio of 10.79x, trading lower than its peers’ median of 13.06x. JELD’s 5-year average is at 12.68x, trading higher than its current one. Given JELD's weaker growth outlook and profitability margins, it is fair for JELD to be trading at a discount as compared to its peers and lower than its 5-year average. The market revenue estimate for 2024 is $4.01 billion, while that for 2025 is $4.15 billion. JELD’s EPS for 2024 and 2025 stands at $1.45 and $1.75 per share, respectively. During the earnings calls, JELD lowered its 2024 guidance from $4.00 to $4.30 billion to $3.90 to $4.10 billion. At the midpoint, revenue guidance is $4.00 billion, which is closely in line with the market revenue estimate. Therefore, combining this with my forward-looking analysis, the market’s estimates are reasonable and justified. By applying my target P/E of 10.79x to its 2025 EPS estimate, my 2025 target share price is $18.88, representing an upside potential of 21%.   Author's Relative Valuation Model Risks & Conclusions  If monetary easing and industry demand do not normalize sooner than we expect, JELD will continue to struggle as the high-interest rate environment continues to eat into housing sales and projects. Even if the ECB has managed to lower its rate, the Fed’s policies can still influence the global financial condition, which the ECB might not be able to shield from. A larger interest rate spread would weaken the euro, which would offset the ECB’s initial target to reduce financing costs. In the short term, JELD would still struggle. But with a gradual recovery of the housing market, JELD will stand to benefit in the long run. In the meantime, management is actively taking action with their initiatives to improve margins. Given the double-digit upside potential, I would give it a “buy” rating.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.24.0","shortVersion":"4.24.0","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2437480620"}