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Bear of the Day: Jeld-Wen Holding

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As we referenced in the Bull of the Day today, 2018 has been a difficult year for the shares of home builders, with fears about rising commodity costs and interest rates threatening to slow demand for construction. While the homebuilders themselves seem to have weathered the storm and are now reporting better than expected results, many smaller suppliers have not done as well and are now facing continued reductions in expectations going forward.

Jeld-Wen Holding (JELD - Free Report) went public in January of 2017 at an IPO price of $23/share and despite a rocky start with a big miss in their first earnings report, found their footing later in the year, finishing 2017 north of $39 – 70% higher than the IPO.

Unfortunately, 2018 has been a rough year so far for Jeld-Wen with two significant misses in their last three reports and a share price that has tumbled all the way back to $26.67/share as of Wednesday’s close – just 15% above the IPO and down 32% on the year. The Building Products Industry as a whole is down just under 4% in 2018 and the S&P 500 shows a total return of better than 8%.

Jeld-Wen underwent a major management change earlier this year with the unexpected departure of former President and CEO Mark Beck who led the company through its IPO. The company did not release any details on Beck’s departure other than to say that it was a “mutual decision.” Management changes are common and not necessarily a sign of trouble, but the timing of Beck’s resignation – so soon after the IPO and in the midst of the acquisition of two smaller manufacturing companies – raises questions about the strength and continuity of management at the company.

Beck was replaced with an interim CEO, and after a four-month search, JELD named Gary S. Michel, formerly of Honeywell, International.

Financially, the disappointing results at Jeld-Wen are due to a combination of declining market share, shrinking net margins and increased debt.

The balance sheet at Jeld-Wen has deteriorated during 2018 with total debt increasing from $1.27B to $1.54B. Cash and equivalents were reduced from $220M to 137M. With negative cash flow from operations of $8m and $57M in capital expenditures so far this year, free cash flow through the second quarter is ($65M), considerably lower than the $46M in free cash flow the company reported in the first half of 2017.

Guidance for the balance of 2018 was disappointing as well, with the company lowering their Outlook for both net revenue growth and EBITDA while leaving guidance for capex unchanged. Analyst estimates have fallen as well with 9 recent downward revisions in the past 60 days. The Zacks Consensus Estimate for 2018 earnings now stands at $1.86/share – 11% lower than 60 days ago.

JELD is currently a Zacks Rank #5 (Strong Sell).

The Buildings Products industry can be fiercely competitive and right now, Jeld-Wen is not a sensible holding for investors. Armstrong Flooring (AFI - Free Report) and Trex Company (TREX - Free Report) , both Zacks Rank #1 (Strong Buy), are much better positioned to take advantage of improving conditions in the space.

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