JELD-WEN has been treading water for the past six months, recording a small return of 3.6% while holding steady at $1.30. The stock also fell short of the S&P 500’s 8.9% gain during that period.
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Why Do We Think JELD-WEN Will Underperform?
We’re passing on JELD-WEN for now. Here are three reasons you should be careful with JELD, plus one stock we’d rather own.
1. Core Business Falling Behind as Demand Declines
In addition to reported revenue, organic revenue is a useful data point for analyzing Home Construction Materials companies. This metric gives visibility into JELD-WEN’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.
Over the last two years, JELD-WEN’s organic revenue averaged 10.4% year-on-year declines. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests JELD-WEN might have to lean into acquisitions to grow, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus). 
2. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
Over the last few years, JELD-WEN’s ROIC has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
JELD-WEN burned through $160.5 million of cash over the last year, and its $1.24 billion of debt exceeds the $57.22 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the JELD-WEN’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of JELD-WEN until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
JELD-WEN falls short of our quality standards. With its shares lagging the market recently, the stock trades at 8.8× forward EV-to-EBITDA (or $1.30 per share). At this valuation, there’s a lot of good news priced in - we think other companies feature superior fundamentals at the moment. We’d recommend looking at one of Charlie Munger’s all-time favorite businesses.
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