2023-09-14 10:45:07 ET
Summary
- JELD-WEN Holding, a building products company, offers significant upside for investors despite recent underperformance in the market.
- The company has experienced a decline in revenue due to a reduction in volume, but net profits and operating cash flow have improved.
- The housing market is showing signs of recovery, which should benefit companies like JELD-WEN, and the stock is considered cheap compared to similar firms.
At this point in time, it might be difficult for some investors to come to accept that companies that are in any way tied to the housing market might make for some attractive opportunities. After all, backlog in the homebuilding space is drastically lower than what it was the same time last year. However, as I have indicated in other articles , there are some promising signs in that space. And that could result in some companies that have struggled up to this point offering significant upside for investors moving forward. One such prospect that is worthy of significant consideration is JELD-WEN Holding ( JELD ), a producer and seller of interior and exterior building products such as windows, doors, and similar offerings. In recent months, shares have appreciated, but barely relative to the broader market. This is in spite of the fact that bottom line performance is generally positive and that shares of the company look cheap, both on an absolute basis and relative to similar firms. Given these factors, I feel comfortable rating the company a solid 'buy' at this time, reflecting my belief that it should generate an upside that exceeds what the broader market should experience for the foreseeable future.
The market is improving at last
The last article that I wrote about JELD-WEN was published in the middle of February of this year. In that article, I lauded the company for its attractive sales and cash flow growth leading up to that point. The stock had, unfortunately, underperformed the broader market even back then. But that didn't stop me from rating the company a 'buy'. Unfortunately, since then, performance has continued to lag the S&P 500. Since the publication of that article, shares have generated upside of only 4.7% at a time when the S&P 500 has risen 8.5%. That's very close to double the return of our prospect.
To say that underperformance was completely unwarranted would probably not be correct. In addition to facing continued declines in backlog in the home construction market at that time, the company has also posted some mixed financial results since the article came out. Consider performance for the first half of the 2023 fiscal year as an example. Total revenue for that time came in at $2.21 billion. That's down slightly from the $2.22 billion the company reported one year earlier. This decline was driven by an 8% hit caused by a reduction in volume That was mostly offset by an 8% benefit from higher pricing. Not only that, but management has also indicated that sales this year will be substantially lower than what they were in 2022. Overall revenue is forecasted to be between $4.2 billion and $4.4 billion. At the midpoint, that would translate to a year-over-year decline of 16.2% versus the $5.13 billion the company generated in 2022. This implies that revenue in the second half of the year will be materially weaker than it was in the first half on a year-over-year basis.
Although the top line showed signs of weakening, the bottom line for the company was largely better. Net profits in the first half of the year totaled $53.4 million. That's up from the $45.3 million reported the same time last year. Operating cash flow went from negative $165.7 million to positive $153.4 million. Though, if we adjust this for changes in working capital, we get a slight drop from $136.2 million to $129.4 million. Meanwhile, EBITDA for the company expanded from $176.3 million to $188.2 million.
When it comes to this year as a whole, the only profitability metric that management gave guidance on was EBITDA. They said that should come in at between $350 million and $370 million. As you can see in the chart above, that stacks up negatively against the $422.2 million reported last year and the $465.1 million reported the year before that. If we assume that operating cash flow will change at the same rate year over year, then we would expect a reading for 2023 of $216.7 million.
Company | Net New Orders - Most Recent Quarter | Net New Orders - 1 Year Earlier |
KB Home ( KBH ) | 3,936 | 3,914 |
Taylor Morrison Home Corporation ( TMHC ) | 3,023 | 2,514 |
Meritage Homes ( MTH ) | 3,340 | 3,767 |
Century Communities ( CCS ) | 2,317 | 2,233 |
Beazer Homes USA ( BZH ) | 1,200 | 925 |
PulteGroup ( PHM ) | 7,947 | 6,418 |
NVR, Inc. ( NVR ) | 5,905 | 4,663 |
D.R. Horton ( DHI ) | 22,879 | 16,693 |
*Financial results through the SEC EDGAR Database
For many investors, this continued weakening on the bottom line might be all the reason needed in order to sell and look for opportunities elsewhere. But as I mentioned earlier in this article, the housing market that JELD-WEN relies on is finally starting to turn the corner. In the table above, for instance, I looked at new orders, on a net basis, for eight major homebuilding companies for the most recent quarter. Seven of the eight firms reported year-over-year increases in orders, with the aggregate year-over-year increase in orders between the eight firms totaling over 22%. The company that posted the largest increase was Dr. Horton. It saw net new orders come in over 37% higher than they were the same time one year ago. Obviously, there will be some delayed impact on companies that provide goods and services for these homebuilders. But what's important is that the recovery should bode well for companies like JELD-WEN.
Even with the market set to recover at some point in the not-too-distant future, a case could be made that shares don't make sense to buy into because they are expensive. However, that argument quickly falls apart. In the chart above, I priced shares of the company using the forward estimates for 2023 and using historical results for 2021 and 2022. Even though the stock looks more expensive on a forward basis, I would argue that shares are objectively cheap. As part of my analysis, I also, in the table below, compared JELD-WEN to five similar firms. Using the price to operating cash flow approach, I found that one of the five companies was cheaper than it. And when we look at the picture through the lens of the EV to EBITDA multiple, we find that JELD-WEN is the cheapest of the group.
Company | Price/Operating Cash Flow | EV/EBITDA |
JELD-WEN Holding | 5.4 | 7.4 |
Janus International Group ( JBI ) | 10.7 | 7.7 |
Gibraltar Industries ( ROCK ) | 10.1 | 13.8 |
Griffon Corp. ( GFF ) | 5.1 | 9.3 |
CSW Industrials ( CSWI ) | 17.8 | 16.6 |
PGT Innovations ( PGTI ) | 9.3 | 9.6 |
Takeaway
While I can understand and appreciate the trepidation that many investors and market participants might have, I would argue that the long-term picture for JELD-WEN is looking up. In the near term, we might see some additional pain. But I would be surprised if that continues much into next year. Perhaps for a quarter or two, it might be. But with net new orders coming in strong in the homebuilding space, I believe that an upside for shareholders is quite significant from this point on.
For further details see:
JELD-WEN Holding: A Window Of Opportunity Is Opening In The Housing Market