Griffon Corp (GFF)

Griffon Corp (GFF)

Summary:  ON SALE

Score:  17/20
MOS:  60%
Share Price:  $25
Sticker Price:  $65

Is Griffon Corporation stock a good buy?

Griffon Corporation is a multinational conglomerate founded in 1959 and based out of New York, NY.

Their subsidiaries include:

  • The AMES Companies is a manufacturer of non-powered landscaping supplies such as shovels, rakes, wagons, and water hoses. You can find a lot of AMES products sold at Home Depot, Lowe’s, Walmart, and Costco.
    ClosetMaid is a manufacturer of ergonomic closet shelving storage systems. You can find ClosetMaid products at Home Depot, Lowe’s, and Walmart.
  • Clopay Building Products is a manufacturer of residential and commercial garage and standard entry doors. Clopay Building Products are sold through Home Depot and small businesses that specialize in door installation.
  • CornellCookson is a manufacturer of large-scale rolling steel door and grille products for commercial, industrial, institutional, and retail use. CornellCookson sells these products through 700 independent professional door installers.
  • Telephonics provides intelligence, surveillance, and communications systems for land, sea, and air applications. Major product lines include radar systems for maritime surveillance, search and rescue, and weather applications.

The leadership team at Griffon has revealed a pattern. The Griffon Conglomerate likes to buy businesses that manufacture products for homeowners and sell those products through large channel partners including Home Depot, Lowe’s, Walmart, and Costco. This is especially true for AMES, ClosetMaid, and Clopay. Although CornellCookson doesn’t serve homeowners, this business model is also leveraged through channel partners.

Let’s take a step back and look at three of these businesses from another perspective.

AMES, ClosetMaid, and Clopay fall under the residential real estate industry. The 2008 recession halted home production but it did not halt human reproduction. In other words, home construction slowed but people didn’t stop making more people. Fast forward 10 years and now we’re facing a problem. Where will people live? If you didn’t already know, home prices in the US are at all-time highs and one of the main factors is lack of inventory. In the year 2000, the average home price in the US was $207,000 as stated by this article on Investopedia. Today, the average home price is $284,000 as stated by bmt.com. In 2010, the average list-to-sale time for a home was 64 days. Today, the average list-to-sale time is 25 days.

Another issue the US is facing is the rising price of lumber. As stated in this article from Vox, the average price of 1,000 board feet was between $200 and $400 and now it’s over $1,000. In other words, a home that once would require $10,000 in wood now costs over $40,000. The reason for the increase in lumber prices is caused by Covid-19. People were becoming laid off so lumber producers decided to cut back production with the expectation of home building and home renovation to slow. To their surprise, exactly the opposite occurred. With people now shifting to work-from-home, they moved home improvements up on the priority list. Now, both home improvements and home building are in high demand.

Overall, AMES, ClosetMaid, and Clopay are benefiting from these consumer needs. As long as home renovations and new construction remain in demand, these three companies will benefit which in turn will benefit Griffon Corp.

Here is what the news has to say.

This article from Zacks states that Griffon is worth a look at due to the high demand for diversified conglomerates. These types of business models have the ability to withstand downturns a little easier due to the various industries they serve.

This article from Simply Wall St states that Griffon Corp is on sale by using the DCF (Discounted Cash Flow) method to calculate the intrinsic value which they state as $45.

Now let’s take a look at the 4 M’s.

MOS (Margin of Safety): Tykr shows the financials strong. Within Tykr the ROIC is 5/6, the Equity GR is 3/3, the EPS GR is 3/3, and the Cash GR is 3/3. From a financial standpoint, all entities within Griffon are performing very well.

Meaning: We know that home construction and renovations will continue to remain in demand the next 10 years so AMES, ClosetMaid, and Clopay will continue to grow, especially if they maintain their big-box channel partners. As for CornellCookson, this entity is worth paying closer attention to. Covid-19 has caused a lot of people to work from home which has caused commercial and industrial real estate to slow. This will impact sales but we do know Covid-19 vaccines have helped decrease the cases which have resulted in businesses allowing employees to come back to the office. This shifting trend may result in more commercial and industrial real estate construction which in turn can benefit CornellCookson. As for Telephonics, the demand for maritime surveillance, search and rescue, and weather applications will continue. Of the businesses under the Griffon umbrella, this is my favorite. One reason why is enterprise contracts which can span 7 – 10 years. In some cases, government contracts can span decades. This ensures strong recurring revenue.

Moat: From the conglomerate perspective, Griffon doesn’t really have any competitors. At the individual business level, there are competitors to each, especially the residential businesses such as AMES, ClosetMaid, and Clopay but the unique advantage they have is the channel partner relationships with Home Depot, Lowe’s, Walmart, and Costco.

Management: Ronald Kramer started his career at Citibank and then worked at Ladenburg Thalmann, an investment bank, for 13 years until he eventually became Chairman and CEO in 1995. In 1999 he became Managing Director at Wasserstein Perella & Co, another investment bank. He left wall street in 2002 to become President and Director of Wynn Resorts. In 2008 he succeeded his father-in-law, Harvey R. Blau, as CEO of Griffon. What I like most about Kramer’s career path is his experience in investment banking. This industry can be high pressure and stress, which is not ideal for the long term, but it can force you to learn other businesses in great detail. In other words, if you want to learn how businesses market, sales, operate, and scale, get into investment banking. The same goes for management consulting. Both are great industries to learn fast! Overall, Kramer’s investment banking history is a perfect foundation to lead a conglomerate such as Griffon.

Now let’s take a look at the financials. A good value investor should be able to read the income statement, cash flow statement, and balance sheet and within 60 seconds have a pretty good idea of how the business is performing.

Revenue (Found on the Income Statement)
2017:  $1.5B
2018:  $1.9B
2019:  $2.2B
2020:  $2.4B
Revenue has a steady increase.

Net Income (Found on the Income Statement)
2017:  $14M
2018:  $125M
2019:  $37M
2020:  $53M
Net Income has increased from 2019 to 2020. Although the net income has fallen off since 2018, the trend is increasing again.

EPS (Found on the Income Statement)
2017:  .36
2018:  3.06
2019:  .91
2020:  1.25
EPS has increased from 2019 to 2020.

Free Cash Flow (Found on the Cash Flow Statement)
2017:  $47M
2018:  $55M
2019:  $61M
2020:  $62M
Free Cash Flow has increased consistently.

Total Assets (Found on the Balance Sheet)
2017:  $1.8B
2018:  $2B
2019:  $2B
2020:  $2.4B
Total Assets have increased significantly in 2020.

Total Liabilities (Found on the Balance Sheet)
2017:  $1.4B
2018:  $1.6B
2019:  $1.5B
2020:  $1.7B
Total Liabilities have increased which is okay.

Total Debt (Found on the Balance Sheet)
2017:  $979M
2018:  $1.1B
2019:  $1.1B
2020:  $1B
Total Debt has decreased slightly which is a good sign.

Total Equity (Found on the Balance Sheet)
2017:  $398M
2018:  $474M
2019:  $477M
2020:  $700M
Total Equity has increased substantially in 2020. This is a great sign.

With a score of 17/20 and a MOS of 60%, the financials are strong. When you look at the meaning, we know residential real estate construction will continue to remain in demand. With the moat, Griffon’s businesses do have competitors but the conglomerate as a whole doesn’t have any major competitors. With the management, Kramer is a perfect fit to lead this company. Overall, conglomerates are similar to an Index Fund or ETF. If you want a little diversity within one stock, especially a stock with great financials, Griffon is worth a look.

The Summary, Score, and MOS of this stock may have changed since the posting of this review. Please login to Tykr to see up-to-date information.