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JELD-WEN (JELD) Research Report: Q1 CY2024 Update


Full Report / June 06, 2024

Building products manufacturer JELD-WEN (NYSE:JELD) missed analysts' expectations in Q1 CY2024, with revenue down 11.2% year on year to $959.1 million. It made a non-GAAP profit of $0.21 per share, down from its profit of $0.35 per share in the same quarter last year.

JELD-WEN (JELD) Q1 CY2024 Highlights:

  • Revenue: $959.1 million vs analyst estimates of $965.9 million (small miss)
  • EPS (non-GAAP): $0.21 vs analyst estimates of $0.18 (17.4% beat)
  • Gross Margin (GAAP): 18%, up from 17.7% in the same quarter last year
  • Free Cash Flow was -$45.7 million, down from $41.7 million in the previous quarter
  • Organic Revenue fell 13.1% year on year
  • (7.3% in the same quarter last year)
  • Market Capitalization: $1.30 billion

Founded in the 1960s as a general wood-making company, JELD-WEN (NYSE:JELD) manufactures doors, windows, and other related building products.

The company serves the North American and European construction market with building materials. Simply put, its products give homebuilders the materials and products needed to build new homes and remodel existing ones.

JELD-WEN’s products include interior and exterior doors like patio doors and sliding door systems. It also offers non-residential doors made of steel, glass, and fiberglass to meet the often custom needs of enterprise customers. Its window products range from wood and vinyl residential windows to multi-pane windows with high-performance glazing that boast superior energy efficiency. The company’s offerings try to strike a balance between utility and aesthetics.

Door and window sales constitute the vast majority of JELD-WEN’s revenue. While the company does provide some installation services, they do not generate a meaningful portion of sales.

Home Construction Materials

Traditionally, home construction materials companies have built economic moats with expertise in specialized areas, brand recognition, and strong relationships with contractors. More recently, advances to address labor availability and job site productivity have spurred innovation that is driving incremental demand. However, these companies are at the whim of residential construction volumes, which tend to be cyclical and can be impacted heavily by economic factors such as interest rates. Additionally, the costs of raw materials can be driven by a myriad of worldwide factors and greatly influence the profitability of home construction materials companies.

Competitors offering door and window building materials include Masonite (NYSE:DOOR), and private companies Pella and Ply Gem.

Sales Growth

A company's long-term performance is an indicator of its overall business quality. While any business can experience short-term success, top-performing ones demonstrate sustained growth over multiple years. JELD-WEN had weak demand over the last five years as its sales fell by 1.1% annually, a rough starting point in our assessment of quality. JELD-WEN Total Revenue

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. JELD-WEN's annualized revenue declines of 7.1% over the last two years suggest its recent demand was even weaker than before.

JELD-WEN also reports organic revenue, which strips out currency fluctuations and one-time events like acquisitions because they don't accurately reflect the company's demand. Over the last two years, JELD-WEN's organic revenue was flat. Because this number is better than its revenue growth, we can see that some mixture of foreign exchange rates and divestitures dampened its top-line performance. JELD-WEN Year-On-Year Organic Revenue Growth

This quarter, JELD-WEN missed Wall Street's estimates and reported a rather uninspiring 11.2% year-on-year revenue decline, generating $959.1 million of revenue. Looking ahead, Wall Street expects revenue to remain flat over the next 12 months.

Gross Margin & Pricing Power

All else equal, we prefer higher gross margins. They usually indicate that a company sells more differentiated products and commands stronger pricing power.

JELD-WEN has poor unit economics for an industrials business, signaling that its products are commodities and it operates in a competitive market. As you can see below, it's averaged a paltry 21.6% gross margin over the last five years. Said differently, JELD-WEN had to pay a chunky $78.42 to its suppliers for every $100 in revenue.

JELD-WEN Gross Margin

This quarter, JELD-WEN's gross profit margin was 18%, in line with the same quarter last year. Zooming out, JELD-WEN's margin has been trending down over the last 12 months, decreasing by 5.7 percentage points year-on-year. If this trend continues, it could suggest deteriorating pricing power.

Operating Margin

JELD-WEN was profitable over the last five years but held back by its large expense base. It demonstrated weak profitability for an industrials business, producing an average operating margin of 3.5%. This isn't too surprising given its low gross margin as a starting point for ultimate operating profitability.

Analyzing the trend in its profitability, JELD-WEN's annual operating margin decreased by 1.9 percentage points over the last five years. The company's performance was poor no matter how you look at it. It shows operating expenses are rising, and it cannot pass those costs to its customers.

JELD-WEN Operating Margin (GAAP)

This quarter, JELD-WEN generated an operating profit margin of negative 3%, down 5.7 percentage points year on year. Conversely, the company's gross margin actually rose, so we can assume its recent inefficiencies were driven by increased general expenses like sales, marketing, and administrative overhead.

EPS

We track the long-term growth in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company's growth was profitable.

JELD-WEN's flat EPS over the last five years was weak but better than its 1.1% annualized revenue declines. However, this alone doesn't tell us much about its day-to-day operations because its operating margin didn't expand.

JELD-WEN EPS (Adjusted)

We can take a deeper look into JELD-WEN's earnings to better understand the drivers of its performance. A five-year view shows that JELD-WEN has repurchased its stock, shrinking its share count by 15.8%. This tells us its EPS outperformed its revenue not because of increased operational efficiency but financial engineering, as buybacks boost per share earnings.

Like with revenue, we also analyze EPS over a shorter period to see if we are missing a change in the business. For JELD-WEN, its two-year annual EPS declines of 6.3% show its recent history was to blame for its underperformance over the last five years. These results were bad no matter how you slice the data.

In Q1, JELD-WEN reported EPS at $0.21, down from $0.35 in the same quarter last year. Despite falling year on year, this print beat analysts' estimates by 17.4%. Over the next 12 months, Wall Street expects JELD-WEN to grow its earnings. Analysts are projecting its EPS of $1.55 in the last year to climb by 13.2% to $1.76.

Cash Is King

If you've followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills.

JELD-WEN has shown weak cash profitability over the last five years, putting it in a pinch as it gives the company limited opportunities to reinvest, pay down debt, or return capital to shareholders. Its free cash flow margin averaged 3.1%, subpar for an industrials business.

Taking a step back, an encouraging sign is that JELD-WEN's margin expanded by 1.9 percentage points during that time. We have no doubt shareholders would like to continue seeing its cash conversion rise.

JELD-WEN Free Cash Flow Margin

JELD-WEN burned through $45.7 million of cash in Q1, equivalent to a negative 4.8% margin. The company's cash burn increased meaningfully year on year while its cash conversion fell 2.5 percentage points. This dynamic shows JELD-WEN's management team spent more cash this quarter and could have been more efficient with that cash.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was its growth capital-efficient? A company’s ROIC explains this by showing how much operating profit a company makes compared to how much money it has raised (debt and equity).

JELD-WEN's five-year average ROIC was 6.9%, somewhat low compared to the best industrials companies that consistently pump out 20%+. Its returns suggest it was mediocre at investing in profitable business initiatives.

JELD-WEN Return On Invested Capital

The trend in its ROIC, however, is often what surprises the market and moves the stock price. Unfortunately, JELD-WEN's ROIC has stayed the same over the last few years. If the company wants to become an investable business, it must improve.

Balance Sheet Risk

Debt is a tool that can boost company returns but presents risks if used irresponsibly.

JELD-WEN reported $234.5 million of cash and $1.22 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company's debt level isn't too high and 2) that its interest payments are not excessively burdening the business.

With $369.9 million of EBITDA over the last 12 months, we view JELD-WEN's 2.7x net-debt-to-EBITDA ratio as safe. We also see its $50.77 million of annual interest expenses as appropriate. The company's profits give it plenty of breathing room, allowing it to continue investing in new initiatives.

Key Takeaways from JELD-WEN's Q1 Results

We enjoyed seeing JELD-WEN exceed analysts' EPS expectations this quarter. On the other hand, its operating margin missed and its revenue fell short of Wall Street's estimates. Overall, this was a bad quarter for JELD-WEN. The company is down 1.7% on the results and currently trades at $14.89 per share.

Is Now The Time?

JELD-WEN may have had a tough quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We appreciate companies solving complex business problems, but in the case of JELD-WEN, we'll be watching from the sidelines. Its revenue has declined over the last five years, but at least growth is expected to increase in the short term. And while its projected EPS for the next year implies the company's fundamentals will improve, the downside is its organic revenue growth has been disappointing. On top of that, its weak EPS growth over the last five years shows it's failed to produce meaningful profits for shareholders.

JELD-WEN's price-to-earnings ratio based on the next 12 months is 8.6x. While one can find things to like about JELD-WEN and its valuation is reasonable, we think there are better opportunities elsewhere in the market.

Wall Street analysts covering the company had a one-year price target of $20 right before these results (compared to the current share price of $14.89). Readers should still exercise caution as analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other lucrative business lines. As a result, they typically hesitate to say bad things for fear they will lose out on other business. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

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