May 28, 2021
[16 min Read]
Griffon Corporations is a diversified management and holding company, who conducts their business through their subsidiaries. Griffon Corp. was founded in 1959, is headquartered in New York, NY, and is listed on the NYSE under the ticker $GFF.
Griffon owns, operates, and acquires businesses in multiple industries and geographic locations. Griffon provides innovative, branded products that are of superior quality, which helps them to differentiate from the rest of their competition.
Griffon operates a diverse portfolio of businesses, (which will be explained in depth later in this report) to reduce variability, seasonality, and cyclicality.
Griffon Corp. has split their business operations into 3 main segments:
These segments will be explored in more depth under the “company information section”
Home Improvement Spending:
If I asked you to think of one product that was the most popular product bought by consumers in 2020, what would you say? I know I would say face masks and/or hand sanitizer, and this is probably what most other people would also say. But what if I told you that kitchen faucets, kitchen cabinets, and toilets were the most popular products during the pandemic. Some of you might think I am lying; however, I am in fact telling you the truth (hook me up to a polygraph tester, and it will confirm this).
According to data from the NPD group, the home improvement sector skyrocketed 22% during the pandemic. This is no surprise, as even before the pandemic, this sector was still gaining traction as the homeownership rate was quickly increasing.
Furthermore, 77.2% of people took on at least one home improvement project (ranging from gardening to full remodels). This was made possible by the extra disposable incomes that many Americans enjoyed during the pandemic, extra income that would be best spent where we were all forced to spend the majority of our time in, this being our homes. This surge in home improvements sent stocks like Home Depot ($HD) and Lowe's ($LOW) skyrocketing in 2020, and even in 2021.
This extra spending on home improvement also helped companies that manufacture home improvement goods such as toilets, faucets, cabinets etc. Some companies that also benefitted from this additional spending include Ethan Allen ($ETH), Masco ($MAS), and many more. This is also true for some of the AMES Company's subsidiaries, such as Closetmaid, suite symphony, express shelf, master suite, space creations, and style+ who manufacture closet systems, shelving, stackable storage, cabinet pull-outs and racks, and garage/utility systems. It also would have benefitted the subsidiaries of Clopay, which include Holmes Garage Door, and Ideal Door as they both provide residential garage doors. All of these companies listed above are subsidiaries of Griffon Corp. and all would have benefitted from increased home improvement spending.
Lastly, it is commonly known that since the pandemic started, low interest rates have fueled the housing market, and with this string housing market came increased home improvement spending. However, it is important to think as an investor “what will happen if this doesn't continue, what if the housing market slows down or has a correction”. It obviously depends on how severe this correction would be, if it was 5-10%, or if it was 90% and we were all sent back to Armageddon. A good example of the effects on homme improvement spending during a smaller correction comes from 2019. In 2019, the housing market dropped 7% to start the year, and the general outlook was either negative or stagnant. However, during this correction, Harvard studied a wide variety of cities and no city that they studied exhibited a decrease in remodelling spending amounts. Despite the overall slowdown of the market, many cities exhibited increased spending, this trend is favourable for companies like Griffon, as we might see some sort of correction to the housing market in the near future.
Outdoor living spaces have always been viewed as a luxury or nice-to-have addition to people's homes, however the COVID-19 pandemic changed this view from a nice-to-have addition to a necessity. This is largely due to the amount of time people are looking to escape their homes and the indoors from being “couped up at home” as a result of the pandemic. This is causing people to spend their extra, saved, disposable income on their “outdoor retreats” and enjoy their time outside.
57% of homeowners plan on continuing their use of outdoor spaces after the pandemic is over. Many of these people are also willing to make investments into their outdoor spaces to make it more livable and add value to their homes. Since there is this level of commitment to improving their outdoor spaces even after the pandemic, it is likely that we see this trend continue for the foreseeable future.
As a result of this willingness to invest in their own backyards, several pool companies have gone public and are growing quickly. Goldman Sachs is forecasting a 12% CAGR in the pool industry this year and has upgraded their estimates on several pool stocks accordingly. However, this additional outdoor spending is not just limited to pools. Scotts Miracle-Grow ($SMG) has grown by over 160% since pandemic lows, Brightview (landscaping company) ($BV) has grown by over 100% since pandemic lows, and many other outdoor living/improvements stocks have also benefitted.
This benefit was felt within Griffin Corp. as they have many subsidiaries that provide long-handle, yard, striking, and hand tools as well as other yard improvement tools (ie. Wheelbarrows, and cleaning tools). Furthermore, some of Griffin Corp's subsidiaries offer pots/planters, decorative aggregates, water features, water hoses, outdoor decor ad outdoor lifestyle products. These subsidiaries of Griffin Corp. that offer these products have benefitted from the increased amount of spending to improve personal outdoor living spaces.
Studies have shown that today US consumers prefer US products that claim lower environmental impacts. However, this was not always the case as people used to think US manufactured goods were cheap and/or inferior. Furthermore, consumers are now more worried about where their products are sourced from and if the manufacturing processes are ethical and/or sustainable. This recent surge in demand for US made products has helped many local manufacturers gains business.
Joe Bidens newly released infrastructure plan noticed the change in consumer preferences over domestic products and assigned a budget for manufacturing job creation in the USA. This plan helps to convert US manufacturing from a dying industry to a National asset. However, many of these jobs will be focused on creating jobs in the green energy sector.
This shift in consumer preference in conjunction with additional funding for US manufacturing creates the perfect environment for companies like Griffon Corp. and their subsidies who create affordable, quality products that are manufactured ethically in the USA. There is no data available on the effects that this will have on Griffin Corp. as a company however, it will be interesting (to say the least) to see the effects that these factors will have on their business.
I found Griffon Corp's WACC on a website called Gurufocus, in which they explained their calculations and arrive at a final figure of 9.48%. This figure is consistent with other websites and estimates which are all around the 9% range. This WACC is used in both of my DCF models.
I found the CAGR through looking at $GFF's financials, in which I found the annual EBIT growth rate over the past 4 years. By doing this I arrived at a CAGR of 23.18%.
Interest Expense Increase Rate:
To find the interest expense increase rate I took the average growth in the interest expense over the past 3 years. By doing this I arrived at an interest expense increase rate of 1.46%
I was able to find Griffon Corp's annual effective tax rate for the fiscal year 2020 in their 10-K filing with the SEC. Griffon Corp. stated that their annual tax rate for 2020 is 32.2%.
Free Cash Flow (FCF) CAGR:
This growth rate is only found in my second DCF model, in which I used Griffon Corp's expected FCF for 2021 and found the CAGR of their historic FCF's (through their investor presentation) to estimate future FCF growth.
There are a couple of similar companies in terms of operations, market cap, and geography. These companies were all included within the comparable analysis. These companies consist of Stanley Black & Decker ($SWK), Snap-On Inc. ($SNA), The TORO Company ($TTC), and The Eastern Company ($EML).
The closest competitor/company that would be comparable to the operations of Griffon Corp. would be TORO. This is because the TORO Company, like Griffon has many subsidiaries that manufacture different products, and the go through many acquisitions. However, when we look at TORO through the comparable analysis, they are one of the most, if not the most overvalued company on the list. This fact might hint at the fact that the comparable analysis might be understating Griffon Corp's fair value and is something to keep in mind.
Investment Valuation and Plan:
In order to value Griffon Corp. I decided to undergo 2 DCF models of my own, as well as comparing my results to the DCF model achieved through tracktak (a DCF calculation cite). Additionally, I decided to undergo 3 comparable analyses, which will be explained further under the “comparable analyses” section.
In this DCF model I used the WACC, CAGR, Interest expense increase rate, and tax rate as described in the “valuation information” section. By utilizing these figures, I arrived at a fair value of $36.37/share, which implies an upside of 39.78%. This upside is very reasonable, but I decided to also undergo a second DCF to validate these results.
In this DCF I used figures from Griffon Corp's investor presentation to undergo the DCF. In this presentation they showed their FCF figures over the past 5 years and estimated their 2021 FCF. I started this DCF with their estimated 2021 FCF's and then applied a growth rate to it. This growth rate was found by looking at the FCF growth over the past 3 years (which can be found in the “valuation information section”. Once I arrived at the FCF's between 2021-2030, I applied the same WACC (as found in the 1st DCF) to discount the FCF's to their present values, in order to value Griffon Corp. This DCF arrived at a fair value of $60.04/share, which implies an upside of 130.75%. This is much larger than the previous DCF valuation, but consirms that Griffon Corp is undervalued.
I took the average of the 2 DCF models that I conducted in order to get one price target via DCF models. By doing this I arrived at an average valuation of $GFF of $47.35, which implies an upside of 89.98%.
In order to arrive at this DCF I had to input the CAGR, Griffon's target operating margin, and the year of convergence. By inputting these figures, TrackTak automatically populated a DCF model (which can be found below as an image). This DCF arrived at a fair value of $64.00/share, which implies an upside of 145.96%. This is similar to my 2nd DCF model and further confirms that $GFF is undervalued.
I used this multiple to value Griffon Corp. because it is a commonly used multiple when valuing companies. When comparing Griffon Corp's EV/EBITDA multiple to that of their competitors (listed in the “competitor information” section), the comparable implied that Griffon Corp has a fair value of $40.90/share, which implies an upside of 57.19%.
This multiple is most commonly used when companies undergo acquisitions. This is very much the case when looking at/valuing Griffon Corp, as we know they have completed 12 acquisitions in the past 7 years. By comparing this multiple to that of their competitors, Griffon Corp's fair value is $64.65/share, which implies an upside of 148.46%.
Like the EV/EBITDA multiple, P/E is used very commonly when valuing companies. By comparing Griffon Corp.'s P/E to that of their competitors, we find that $GFF has a fair value of $40.42/share, which implies an upside of 55.34%. All of the comparable have different fair values, however, there is one thing that they all have in common. This one factor is that they all indicate that $GFF is undervalued.
Average Comparable Analyses:
In order to find one price estimate for the comparable analyses, I averaged the fair values of all 3 estimates. By doing this, I arrived at a fair value of $48.66/share, which implies an upside of 87.01%. This is very close to the figure achieved through the average DCF valuation.
Any entrance into a position of $GFF, under the $30.26 level, would be a very good buy that will help to mitigate risk.
I would consider selling my position of $GFF as soon as the price hits $47.35, as stated in the average DCF valuation.
By following this plan (assuming you bought at the current price of $26.02) would yield a 81.98% return, which is a very favourable return for investors.