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Goldman Sachs Upgrades Fortune Brands, Downgrades Jeld-Wen In Building Products Pair Trade

Goldman Sachs Upgrades Fortune Brands, Downgrades Jeld-Wen In Building Products Pair Trade

Investor sentiment for the housing market is pointing to consistently growing "angst" throughout 2018, and the now "lumpy" housing market should persist in the medium-term, according to Goldman Sachs.

Investment opportunities remain in the sector, but they must be carefully chosen, in the sell-side firm's view.

The Analyst

Goldman Sachs' Doug Clark upgraded Fortune Brands Home & Security Inc (NYSE: FBHS)'s from Neutral to Buy with a new $54 price target.

The analyst downgraded Jeld-Wen Holding Inc (NYSE: JELD) from Buy to Neutral with a new $20 price target.

The Thesis

One of the more concerning metrics impacting the housing industry is affordability, Clark said in a research report. (See his track record here.) 

Home prices have appreciated by 5 percent or more for several years, the analyst said, while Goldman Sachs' affordability index moved into unfavorable territory in 2018.

Existing home sale trends normalized a few years ago, mortgage rates are moving higher and many homeowners are choosing to renovate their existing homes instead of moving to newer or nicer properties, Clark said. 

Homebuilders have been impacted by multiple negative trends within the building products sector, losing 33 percent year-to-date and trading near valuation levels that haven't been seen since 2008, the analyst said. 

Fortune Brands

Despite being a home and security products company, Fortune Brands boasts strong exposure to the repair and remodel, or RnR, end markets at approximately 65 percent of sales, Clark said in the upgrade note.

The company's move toward the value-conscious market segment will generate a favorable impact next year, as organic growth should grow 4.1 percent after falling 2.4 percent in 2018, the analyst said. 

Fortune Brands stock trades at a 21-percent discount to the S&P 500 index, which is the widest discount since it started trading in 2011, according to Goldman Sachs. 

The stock is trading in-line with its peers on an EV/EBITDA basis despite its more defensive revenue exposure, superior EBITDA margins and premium returns, Clark said. 

Goldman Sachs' new $54 price target is based on 10 times 2019 EV/EBITDA, which is a two-turn discount to its historical average and implies 27-percent upside. 

Related Link: Fortune Brands Downgraded By BofA On Cautious View For Building Products Stocks


Goldman Sachs' bullish case for door and window manufacturer Jeld-Wen is based on the company's "self-help/margin expansion" story, although any benefits are unlikely to be seen until 2020 and beyond, Clark said in the downgrade note.

The company's wood windows business showed signs of a struggle in the first half of 2017 due to operational changes, including new product introductions, the analyst said.

The company has improved its lead time, he said, but is "still grappling" with prior problems.

Jeld-Wen's $200-million cost cutting strategy is likely to proceed slowly, with any notable benefits pushed out until 2020 or later, the analyst Clark said.

Investors should consider sitting on the sidelines until management shows several quarters of "proven progress," according to Goldman Sachs. 

Price Action

Fortune Brands shares were down 0.26 percent at $42.54 at the time of publication Monday, while Jeld-Wen shares were plunging 18.72 percent to $15.39. 

Related Link: RBC, Baird React To Jury Ruling In Jeld-Wen Antitrust Litigation

Latest Ratings for FBHS

Feb 2021Credit SuisseMaintainsNeutral
Feb 2021KeyBancMaintainsOverweight
Jan 2021BMO CapitalInitiates Coverage OnOutperform

View More Analyst Ratings for FBHS
View the Latest Analyst Ratings


Related Articles (FBHS + JELD)

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