Description

Executive Summary

JELD-WEN (JELD) is a long. JELD is an underappreciated turnaround story with significant margin expansion potential, long-term industry tailwinds at its back, an attractive valuation, and significant room for upside to consensus estimates. The key points of my thesis are as follow:

1. Significant margin opportunity catalyzed by new management team

   1. JELD’s EBITDA margins are roughly half of its closest peer Masonite (DOOR)

   2. My work, including discussions with JELD formers, suggests that much of this margin gap is non-structural in nature and that JELD’s margin opportunity is real and significant

   3. Following the departure of the prior CEO, whose misexecution led to the margin gap vs. DOOR expanding rather than closing, JELD brought in a new CEO who appears to be executing the proper playbook to realize the company’s latent earnings potential.

2. Favorable industry tailwinds

   1. Years of underbuilding in the wake of the financial crisis has left the US significantly short of housing supplyPopulation growth among key first-time homebuying cohort and normalization of headship rates are driving an inflection in underlying demand at the same time that supply has yet to catch up with the production deficit from the last decade

   2. Low existing home supply for the foreseeable future given the lack of incentive for homeowners locked in at mortgage rates much lower than prevailing levels means that new homes will be an increasingly larger outlet for growing housing demand

3. JELD trades at a below-average multiple on earnings estimates that should be closer to trough than peak

   1. Investors are capitalizing a 2024 EBITDA number that reflects below-mid-cycle earnings at a below-average historical multiple, despite the supportive industry fundamentals outlined above

   2. JELD’s valuation also embeds little to no credit for the company’s massive margin uplift opportunity

Brief Business Overview

JELD is a global manufacturer of doors (both interior and exterior) and windows. It holds the #1 share position in the US residential door market, #3 in the US residential window market, and is the #1/#2 residential and non-residential door supplier in most key European geographies.

Following the Australasia business divestiture last year, revenue is split roughly 80%/20% between doors (including value-added door distribution) and windows, respectively. Slightly over 10% of revenue comes from non-residential construction, almost entirely concentrated in Europe. The remaining 80%+ of residential revenue is split roughly evenly between new construction and repair & remodel ("R&R").

Thesis Point 1) Significant Margin Opportunity Catalyzed by a New Management Team

JELD has significant scope for margin, growth and operational improvement.

JELD earns much lower margins than its closest peer Masonite (DOOR), which was recently acquired by Owens Corning. JELD’s North America segment Adj. EBITDA margin were 740bps lower than DOOR in 2023; overall EBITDA margins were 600bps lower (not that JELD’s consolidated 2023 numbers referenced above are pro forma assuming the Australasia business was divested prior to the start of the year). The margin gap has widened significantly in recent years, driven by JELD’s inferior execution during the pandemic and coinciding with the tenure of former CEO Gary Michel, who held the role from June 2018 to August 2022. Specifically, JELD’s Adj. EBITDA margin fell from 11.6% in 2017 to 8.2% in 2022. Over the same period of time, DOOR managed to appreciably increase margins (from 12.5% to 15.4%). In 2017, the consolidated and North American segment margin gaps between JELD and DOOR were 96bps and 143bps, respectively. By 2022, these gaps had grown to 719bps/1,443bps.

JELD’s North American business has also lagged DOOR’s in both volume and pricing performance, particularly during the pandemic. From 2018 to 2022, JELD’s cumulative North American organic volume declined by ~9.8%, vs. a 2.5% decline for DOOR. From 2018 to 2022, JELD’s cumulative North American organic pricing grew by ~38%, vs. 58% growth for DOOR.

While differences in business mix and segmenting methodology make perfect comparisons impossible, the bulk of JELD’s margin differential vs. Masonite is due to non-structural factors. The companies’ North American businesses are highly comparable except for JELD’s exposure to lower-margin windows, which DOOR doesn’t make (while DOOR’s North America segment excludes non residential business, non-residential revenue makes up a very small portion of JELD’s North American business). Assuming 7% normalized margins on windows, I estimate that ~300bps of the North America margin delta is due to structural factors, leaving ~450bps of margin expansion potential if JELD can close the operational gap with DOOR. Of note, JELD’s previous management team had a long-term target of 15%-17% EBITDA margins.

Former employees that I spoke with believe that the margin expansion at JELD opportunity is real and significant and can largely be addressed by tackling low-hanging fruit:

• “I’m bullish. They don’t have to reinvent the wheel. It’s just about basic blocking and tackling.” – Former VP of Operations at JELD-WEN

• “There’s significant opportunity to improve. They’ll eventually get there.” – Former North America CFO at JELD-WEN

• “The fundamental nature of the two companies, their geographic spread, go-to-market, are remarkably similar. There are almost no differences between their NA residential door businesses.” – Matt Hood, former VP of Operations at JELD-WEN

What has driven JELD’s margin underperformance?

My diligence suggests that JELD’s margin underperformance vs. DOOR is readily explainable by a few remediable factors:

Driver of margin underperformance #1: Underinvestment in capex

Owing in large part to its historical PE ownership, JELD has historically spent just ~2% of revenue on capex vs. 3.5%+ for DOOR. Moreover, JELD’s capex has been lower than depreciation expense every year since 2015. 

As a result of this underinvestment, JELD has old plants and equipment that are less efficient and less capable of delivering quality products on time and in full. As service / delivery consistency is one of the most important factors that door manufacturers compete on, this has weighed on JELD-WEN’s market share and volume (driving operating deleverage) and, in some instances, has forced them to compete on price in order to stymie market share losses. The inefficiency and lack of automation in JELD’s plants came to a head during the pandemic, when labor shortages put JELD-WEN at a significant disadvantage vs. competitors whose more up to date equipment enabled them to better manage through these headwinds.

• “If you look at our history, we came out of private equity and then capex has been below depreciation. Historically, I would say some of the underinvestment was a drive by previous teams to drive cash flow for share buyback. This has led to facilities that are less automated, more manual, and less efficient that we would like. It has also led to systems issues across the company combined with a general lack of integration. We see these as low hanging fruit that we know we can address, which is why we guided to higher Capex this year.” – JELD IR

• “If you’re a customer, you want quality doors that are delivered on time consistently. That’s where JELD-WEN has fallen down. They don’t have the people and equipment to make good product on time. They consistently overpromise and underdeliver.” – Former VP of Operations at JELD -WEN

• “100%. Yes and yes. When I was there, if you would look at capex, it was less than depreciation. When Onex went public with JELD-WEN, they had a lean operation, they kept that capex low. They underinvested in the plants. They would have plants that would be less efficient or less automated because they didn’t have the best equipment. I guarantee that it takes less people to make a door at Masonite than it does at JELD-WEN.” –Former North America CFO at JELD-WEN

Driver of margin underperformance #2: Poor real-time price management

JELD was behind in raising prices relative to cost inflation in 2022. Part of JELD’s inability to price to inflation in a timely manner relates to its underinvestment in internal systems, which makes it difficult to accurately measure the cost to produce its products internally and thus price effectively. The company has since been able to catch up somewhat, raising prices 4% in North America and 5% company-wide in 2023, making up some of the delta vs. Masonite. Poor operational execution (e.g., inability to deliver products on item) has also hampered the company’s ability to raise prices.

Driver of margin underperformance #3: Lack of focus and poor integration of acquisitions

JELD-WEN was built largely through a roll up of smaller manufacturers. Acquisitions have historically been poorly integrated, adding further operational complexity to a business that was already managed sub optimally. Acquisitions also diverted management’s attention (and capital) away from necessary internal investments. Previous management teams continued to double down on this strategy, largely in an attempt to acquire their way into higher margin businesses rather than addressing internal low-hanging fruit.

• “They would pursue strategies other than investing in plants and driving costs out of the business.” – Former VP of Operations at JELD-WEN

• “JELD-WEN had a lot of management turnover, and their strategy was also changing. They would whipsaw back and forth. And that bled into not just their operations, but also how they dealt with customers.” – Former North America CFO at JELD-WEN

• “JELD-WEN has so many distractions. They have significant business in Europe and Australia to worry about on top of what they have going on in the US.” – Former Senior Director of Product Management - Interior Doors at JELD-WEN

Catalyst for change: leadership change

Importantly, JELD’s current CEO, Bill Christensen, is pursuing the right playbook to address these issues. Following previous CEO Gary Michel’s resignation in August 2022, JELD appointed Bill as CEO in December 2022. This also followed a number of other key executive changes, including the appointment of a new CFO in June 2022.

As demonstrated by JELD’s underperformance during his tenure, Gary’s approach was ill-suited to address (and in fact contributed to) the issues facing JELD:

• Gary’s capital allocation framework prioritized M&A and buybacks at the expense of internal investments that likely would have generated higher returns, carried less execution risk, and reduced (rather than added to) operational complexity

• Gary tried to chase growth in higher-margin product categories, neglecting operational execution in the more “boring” parts of the door market that account for the vast bulk of JELD’s business and where maintaining low costs and consistent delivery performance are key to success.

  • “Gary would make stupid investments and chase the new shiny thing.” – Former VP of Operations at JELD -WEN

  • “What I will say is that previous management teams focus on execution has been less than stellar. During Covid (and even before) our on time and in full performance was hurting us. That is part of the reason why right now we are focused on improving our core business and reducing costs. We need to get the blocking and tackling done first.” – JELD IR

• Gary tried to replicate the playbook he used in prior executive roles at companies with a more solid operating foundation, without appreciation for just how far behind JELD was from an infrastructure perspective.

Bill Christensen is bringing a new playbook that’s far better suited to the key issues underpinning JELD’s lower margins:

• Bill has repeatedly stated that his capital allocation priorities clearly lie in high return internal investments ignored by previous management teams and debt paydown vs. M&A and buybacks

• After spending an average of ~2.0% of revenue on capex from 2015-2022 (and even less during the latter part of Gary’s tenure at the company), Bill is now guiding to $150-$175mm of capex on $3.9bn-$4.1bn of revenue – or a capex/revenue ratio of 4.1% at the midpoint. This is in spite of near-term housing industry headwinds, highlighting the seriousness with which Bill is addressing internal investment. Examples of investments called out include increasing the use of automation in plants and projects that will help the company use material more efficiently, consistent with the feedback we heard from our VAR.

  • “We do need to get our leverage down below 3x. That's urgent and important, and we're well aware of that, but we also do need to make sure that we have capital available to invest in projects that we think are highly attractive and will present good returns as we go through our transformation process. So those are two clear buckets [of capital allocation priorities] clearly.” – Bill Christensen, 4Q22 Earnings Call

• Bill has a clear focus on streamlining and simplifying the business in order to reduce complexity rather add to it

  • E.g., while leading JELD’s European business, Bill withdrew from the window business in the UK in order to divert management attention and capital to higher-return businesses where the company is better positioned. He sees similar streamlining opportunities for the global portfolio going forward: “We are addressing similar opportunities in our other regions to further streamline and simplify the company.” – Bill Christensen, 4Q22 Earnings Call

• In his previous role as CEO of REHAU, Bill led a turnaround in profitability that was underpinned by restructuring, selling non-core businesses, and streamlining production assets.

  • “Under his leadership as CEO, the turnaround of the Industries Divisions has been successfully achieved and the Divisions now show a very sustainable level of profitability.” – Press Release announcing the departure of Bill Christensen from REHAU

• Feedback from formers that I've spoken to has been positive re: Bill’s ability/willingness to pivot the company’s strategy in the right direction

  • “Bill Christensen – I’m quite optimistic. The people I work with in JELD WEN’s plants at my current job have said that after years of poor leadership, they’re cautiously optimistic. He seems focused on internal investments and blocking and tackling.” – Former VP of Operations at JELD WEN

  • “JELD-WEN just sold their Australasian business […] They’re probably saying that we need to focus more on getting our North America operations in order. I think there’s significant opportunity there.” – Former North America CFO at JELD WEN

While a change in CEO, CFO, and other key executives alone are a noteworthy development, it’s also worth highlighting that the circumstances surrounding the management team have also changed to become more conducive to the actions that will be needed to address the margin gap. In particular, Onex exited its investment in 2021 and no longer has a presence on the board (previously had two seats, including the chairman). Onex’s focus on juicing cash flow and running a traditional private equity playbook (minimizing capex + maintaining high leverage to support capital return and M&A) likely hamstrung JELD from making the necessary internal investments to drive productivity improvements. Additionally, the company’s sale of its Australasia business last year (the proceeds from which were used toward debt pay down) significantly reduced leverage, making it easier to obtain buy-in from the board for increased capital spending on internal projects.

Thesis Point 2) Long-Term Industry Tailwinds at the Company's Back

Despite near-term volume headwinds from interest rates and pullback in R&R spending, the long-term outlook for JELD’s end markets is positive. Simply stated, the US housing market is undersupplied: A decade of significantly below-trend housing starts following the financial crisis has resulted in the U.S. housing market becoming significantly underbuilt. From 2007 to 2020, housing starts averaged ~1.01mm per year vs. the long-term average of ~1.43mm units per year. As a result, this period of underbuilding created a ~5.9mm production deficit, which should provide a supportive backdrop for new housing construction even before considering the numerous tailwinds driving underlying demand growth.

At the same time, key drivers of housing demand are inflecting. The most important component of demand for new homes is household formations. Household formations are broadly a function of: 1) population growth among the adult population and 2) changes in headship rates. From 2000-2014, the US 35-44 year old cohort (the sweet spot for first-time homebuyers) declined in population from 45.2mm to 40.4mm (0.8% annual decline). However, the demographic math has now reversed, and the 35-44 year-old population is now expected to grow from 43.5mm to 48mm (~1.2% annual growth). On top of this, headship rates (particularly among 25-44 year olds) have begun to normalized after falling for the last several years. In particular, the rise of remote work has structurally lifted housing demand (and demand for larger homes) to new normals.

At the same time that these factors are dovetailing to support housing demand, US existing home inventory as measured by the National Association of Realtors is at multi-decade lows. Given the wide gap between prevailing mortgage rates and the rates that existing homeowners are locked in at, homeowners are highly incentivized to remain in their current homes. This low supply of existing homes means that incremental housing demand needs to be increasingly filled by new homes in lieu of existing homes. Note that the number of existing home sales has typically exceeded sales of new homes by a factor of ~5:1, meaning it only takes a small shift in share of overall home sales away from existing homes to meaningfully increase the volume of demand that’s directed to newly constructed homes.

Thesis Point 3) JELD Trades at a Below-Average Multiple on Trough Earnings

JELD currently trades at a 6.0x EBITDA multiple on 2024 numbers. This is a ~1.5x (~20%) discount to its long-term average multiple since the IPO. JELD’s depressed multiple on 2024 earnings is incongruent with the fact that 2024 housing starts should be closer to trough than mid-cycle and a long-term positive fundamental back drop for new home construction outlined earlier in this write-up. This discounted valuation is also inappropriate when considering that JELD’s latent margin expansion opportunity (as roughly estimated based on the consolidated EBITDA margin differential between JELD and DOOR) is close to the largest that it’s been in its history as a public company.

Valuation

My base/bear/bull case targets and key drivers are summarized below.

Base Case:

• Cumulative organic volume stack vs. 2019 = -11.6%

  • Industry Demand Considerations: 2019 housing starts were 1.29mm (888k SF and 402k MF). Normalized housing starts should be higher than the 1.4mm long-term average based on 5mm+ cumulative supply deficit from period of underbuilding that began in 2007 and strong underlying demand tailwinds, though continued affordability issues and economic weakness could be offsets that cause actual new home construction to lag underlying demand. Every 0.5 fewer average doors per SF home detracts ~70bps from JELD's NA volume growth, and every 1% increase in MF mix of housing builds lowers volume by ~20bps. R&R activity should be stable given historically high housing stock age and high levels of home equity.

  • Market share considerations: JELD-WEN has lost share since 2019 due to operational issues. Cumulative NA organic volume growth has underperformed DOOR's NA segment by 9 points from 2019-2022. Given that their underlying capacity is unchanged, there's a meaningful opportunity to recapture share if the new CEO can address these issues and win back business that it lost, though this will take time.

  • Base case assumes that JELD falls short of 2019 volume levels despite higher housing construction activity (~1.4mm vs. 1.29mm in 2019, ~8.5% higher, driven by tailwinds mentioned above). This reflects 1) JELD recapturing less than half of all share lost since 2019 while it experienced operational issues (9 points of organic volume underperformance vs. DOOR since 2019) by 2026; 2) plus modest headwinds to door industry volumes relative to trends in housing starts due to fewer doors per SF home and modest shift in the mix of housing starts towards MF.

• 11.5% consolidated Adjusted EBITDA margin. Note that the previous management team targeted 15%-17% EBITDA margins.

  • 13.5% North America segment Adj. EBITDA margin. Assumes that the new CEO is able to partially close the execution-related margin gap vs. Masonite.

  • 9.5% Europe segment Adj. EBITDA margin. This reflects the impact of recent price increases to offset input cost inflation experienced from 2022 and which the company couldn't fully offset when it was first experienced; normalization of some input costs (e.g., energy); cost reductions.

  • Corporate/Unallocated Items = 1.0% of total revenue, consistent with what can be triangulated from 2024 guidance

• Assume that capex as a % of revenue ramps up to 4.0% in 2024 (in-line with guidance) and remains there.

• 6.5x exit NTM EBITDA multiple. Since its IPO in 2017, JELD has traded at an average forward EBITDA multiple of ~7.5x. This translates to a 6.9%/10.3% LTM/NTM equity FCF yield (undemanding given 1.5x LTM net leverage at exit).

• Based on the above assumptions, I arrive at 2026 EBITDA of $503mm and a price target of $30 vs. a $13 share price today. My price target increases to $34 if I assume the company maintains LTM leverage at 2.5x and uses excess cash to repurchase shares, though that appears unlikely at this juncture.

In a bear case scenario in which organic volumes are over 20% below 2019 levels and consolidated Adj. EBITDA margins are ~8% (in-line with 7.7% pro-forma margin in 2022 and 200bps below the ~9% EBITDA margin the company is effectively guiding to in 2024 - note that 2022 was reflective of several years of terrible operational execution in the years prior and before many of the cost initiatives the company has put in place) and the company trades at 5.5x EBITDA (another 0.5x de-rating from already low levels), the equity would be worth ~$11/share, representing 17% downside. Given the company's discounted valuation vs. its history, significant underlying cash generation (particularly given $1.1bn of NOLs), end market underpinned by several medium-term tailwinds (temporary housing weakness this year notwithstanding), and early signs of an earnings inflection taking place under new management, it's difficult to underwrite a disastrous outcome over a 2-3 year period, while even a conservative set of assumptions can support a double or triple for the equity.

Catalyst

• New CEO is able to execute on the company's margin opportunity

• Earnings beats given conservative consensus estimates

• Further asset sales and deleveraging