Description
Griffon is a mini-conglomerate with 2 divisions: garage doors and home goods (garden tools and ceiling fans). Let's start with home goods.
This division has been under a restructuring for the last few years. Partly due to this (I guess) and partly due to a covid hangover, volumes have dropped almost 50% in the last 2 years. It has continued to shrink double digits in F1H. The goal here is to take cheap products and make them cheaper by moving production out of the US. This strikes me as a risky and tone-deaf strategy in today's world. I think this business will generate around $1B of revenues and $100M of EBITDA, and should receive (at best) 7x. So, $700M of value there, which leaves $4.5B for the other division.
Garage doors have been on fire! GFF has been over-earning in this segment, with recent margins in the low 30's versus long-term target margins in the mid 20's. EBITDA has tripled in the last few years as a result of aggressive pricing and a stable oligopoly. However:
1) Recent Tegus transcripts have discussed lower pricing
2) Large customers (like Home Depot) can see GFF's margins and should push back on them
3) Covid-induced backlogs and long lead-times have normalized and new home construction has likely peaked
4) Commercial demand (doubled from 2019 to 2023) was driven by distribution centers, which have been overbuilt
5) IBP (one of the country's largest installers of garage doors) reported negative comps in this segment last quarter
6) NUE bought a large competitor, can supply it with zero-margin steel, and has publicly stated that they will continue to take share. However, last quarter their "steel products" division declined sharply, though they don't break out garage doors within that.
I believe that as sales slow, the rational oligopoly will give way to a price competitive one, and pricing/margins will collapse. At that point, the multiple will also re-rate lower, and the stock could have ~50% downside.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
more competition in garage doors among softening demand
pricing pressure and margin pressure
multiple compression