This turnaround stock has new management and its shares are a discounted opportunity.
JELD-WEN Holding, Inc. (JELD)
From The Turnaround Letter
JELD-WEN Holding, Inc. (JELD) is one of the world’s largest makers of residential windows and doors. The company was founded in 1960 by Richard Wendt, whose family had used the JELD-WEN name for other properties. In 2011, private equity firm Onex acquired the company, transitioning it from a family-run operation to a global business with professional leadership. It returned to public ownership with its February 2017 initial public offering. Onex currently holds about 31 % of JELD-WEN’s shares. Today, the company has the #1 or #2 market share in North America, Europe and Australia, with manufacturing, distribution and showrooms in 24 countries.
Several issues plague JELD-WEN in investors’ eyes. First, the company’s recent acquisition spree, including 12 deals in the past three years across a wide range of geographies, has stressed its results. Too many of the acquired companies had subpar margins while the overall integration into JELD-WEN was poorly executed. In response, the board removed the CEO this past February.
Also, an unfavorable legal verdict in an antitrust case threatens not only a financial penalty but also divestiture of an important component factory. While the company is appealing the ruling, a final outcome could be years away, adding to investor worries.
With the company’s shares already tumbling from their post-IPO highs near $42, further bad news rattled investors a few weeks ago. Dismal pre-announced third quarter results, combined with the CFO’s departure, produced a 19% one-day price drop. Rising labor, materials and tariff-related costs, combined with JELD-WEN’s difficulties in integrating its mergers, has left investors wondering if the company will be able to restore its margins. Adding to the market’s list of worries are fears about the end of the housing cycle and the economic expansion. The doubts have left JELD shares 60% below their peak and 30% below their $23 IPO price.
While the narrative suggests that JELD-WEN is a broken company, we believe the reality is much brighter. The selection of a new CEO, Gary Michel, who joined in June, is promising. Michel brings valuable operational and turnaround leadership from his successful experiences at building products makers Ingersoll-Rand and Honeywell. His focus is to restore the company’s delivery and service levels, improve its cost structure, simplify its manufacturing complexity and ultimately boost EBITDA margins to the 15% level.
Recent price increases should help offset rising cost inflation and the new tariffs. Importantly, Michel will de-emphasize acquisitions for a while, likely bolstering the company’s already reasonably strong balance sheet.
JELD-WEN has a strong position in an industry that, while cyclical, has enduring long-term secular growth. The company should benefit from any strengthening of the U.S. housing market. Its leading market shares in other regions offer growth potential while dampening any weakness in the domestic market. Moreover, about 44% of its revenues come from repair and remodels, further supporting its revenue stability.
Most of the downside risk from the antitrust litigation appears to be priced into the stock. The company makes a reasonable case that divestiture isn’t an appropriate legal remedy, and so, a favorable outcome could provide a lift. The large ownership stake by a highly-regarded and patient private equity owner brings focus and results-driven governance that is well aligned with all shareholders.
JELD-WEN’s shares trade at an unchallenging 6.6x 2018 estimated EBITDA, among the cheapest in the building products industry. While the market may have closed the door on JELD-WEN, we think the recent share price weakness offers a window of opportunity for turnaround investors.
We recommend the PURCHASE of shares of JELD-WEN Holding (JELD) up to 25.
George Putnam III, The Turnaround Letter, www.turnaroundletter.com, 617-573-9550, November 2018