Description

Griffon Industries is a highly attractive building products company with better than peers financial metrics, a discounted valuation and several catalysts to drive rerating (activist, strategic alternatives, strong earnings). We see ~100% upside to end of year following conclusion of GFF strategic review.

For many years Griffon has been a disappointing stock despite strong financial performance. It has grown revenue organically faster than peer companies and it has expanded margins at a quicker pace. However, the stock has languished for 2 key reasons. 

• Entrenched Management Team - Ron Kramer, the current CEO, was the son in law of the prior CEO who in turn was the son in law of the prior CEO. Management team has had horrible governance with 13 member obsequious board. CEO pays himself well ($20mm a year) despite adding minimal or potentially negative value to Griffon subsidiaries. There is $50mm of holdco corporate expenses that we largely believe is unnecessary (~10% of segment EBITDA).

• Convoluted Structure - Griffon has been a somewhat convoluted business. They previously has 3 segments. Home Building Products (owns Cloplay, premier manufacturer of garage doors), Consumer and Professional Products (owns Ames brand, has 70+% market share in various outdoor consumer products like Wheelbarrows) and an odd Defense business. The synergies of having these three businesses together was dubious and management would keep buying new companies to add to the segments, making things even more frustrating. 

We believe the tide is now turning for Griffon. Voss Capital, an activist investor who has written several great pieces on Griffon and the housing market, launched a proxy fight at Griffon and won a board seat. While only having 1 board seat might imply it is still difficult to effectuate change, several key positive events have unfolded.

1. Griffon sold its defense business for ~$300mm of after tax proceeds, simplifying the structure 

2. Griffon blew out 2Q’22 earnings thanks to >50% pricing in their garage door segment with management significantly raising its full year guide (something GFF seldom does). More importantly, there was a tone change from Ron Kramer that given where his stock price is trading, he would be more focused on buybacks vs acquisitions.

3. NUE purchased CHI Overhead Doors from KKR at 13x TTM EBITDA. While CHI has enjoyed better margins than GFF historically (albeit post recent Cloplay price increase the gap has narrowed), this is a big beautiful comp for GFF

4. Same day as NUE acquisition, GFF announced a strategic review and engaged GS. 

While all of building products is cheap, we believe GFF remains compelling at 7.4x fwd EV/EBITDA, 14% FCF yield with material SOTP upside.

SOTP based on 2022 Expected Financials

Business is cheap (7.4x fwd EBITDA / 15% FCF yield) and we believe in the event a sale is not consummated is well positioned to compound value over time. Company now derives ~70% of EBITDA from its garage segment and pricing, not volumes are driving the bus on growth with volume for their garage segment only CAGRing MSD through 2Q’22vs pricing up >60%. 

Checks on Garage Door Business are very Positive

There is clearly appetite from PE to purchase a leading garage door manufacturer

Tegus Client

Got you. If these companies are put up for sale, what kind of interest do you think there would be?

Former Vice Chairman and CEO at Amarr

If these companies are put up for sale, what kind of interest would there be? Well, man, there's a ton of money on the sideline. So if Griffon

 was put up for sale, Overhead can't buy them and Assa Abloy can't buy them. KKR probably could. But it's a hot product and a hot sector. And I think it would fetch a very nice premium. But I think you got to break apart Griffon  to make it work. Just because you're not left with very much

Catalyst

Strategic Review

In event strategic review fails, continued favorable governance changes

Cloplay compounding