What a brutal six months it’s been for JELD-WEN. The stock has dropped 61.7% and now trades at $6.11, rattling many shareholders. This might have investors contemplating their next move.
Is there a buying opportunity in JELD-WEN, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Despite the more favorable entry price, we're cautious about JELD-WEN. Here are three reasons why we avoid JELD and a stock we'd rather own.
Why Do We Think JELD-WEN Will Underperform?
Founded in the 1960s as a general wood-making company, JELD-WEN (NYSE:JELD) manufactures doors, windows, and other related building products.
1. Core Business Falling Behind as Demand Declines
We can better understand Home Construction Materials companies by analyzing their organic revenue. 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 9.2% 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. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, JELD-WEN’s margin dropped by 8.2 percentage points over the last five years. Almost any movement in the wrong direction is undesirable because of its already low cash conversion. If the trend continues, it could signal it’s in the middle of a big investment cycle. JELD-WEN’s free cash flow margin for the trailing 12 months was negative 1.8%.
3. 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).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. 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.
Final Judgment
JELD-WEN falls short of our quality standards. After the recent drawdown, the stock trades at 8.2× forward price-to-earnings (or $6.11 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are superior stocks to buy right now. We’d recommend looking at a top digital advertising platform riding the creator economy.
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