Griffon Corp.: Under-loved, Under-followed, Ready to Rumble

Griffon Corp. isn't widely covered by Wall Street, yet its tool and building product lines are well-known in their fields. The graphic below provides details about what Griffon does. A third division was sold off recently. Griffon has proven to be a reliable growth company over time, although its earnings were somewhat volatile on their way higher. The two most recent quarterly reports showed outstanding year-over-year growth that far exceeded analyst expectations. Earnings surprises were 200% and 315.2%, respectively, in the periods ended Dec. 31, 2021, and March 30, 2022. The shares took off after the second large earnings beat, hitting $33.38, a new all-time high, on June 7, just a few weeks ago. General market weakness then pulled down Griffon to as low as $25.43 intraday on June 22. Early in the day on Monday, June 27, Griffon was still available in the $26 to $27 range. That appeared to be a gift as future quarters are expected to continue the excellent profit improvement as shown below. The image that follows comes from Value Line, which thinks Griffon's earnings per share for fiscal 2022, which ends Sept. 30, 2022, will come in at $3.29. Yahoo Finance, though, now looks for $3.66 this year. Either way, fiscal 2022 is destined to be Griffon's best year ever by a wide margin. Here is the company's growth since 2013 using Value Line's more conservative estimate. Continuous shareholders did OK, but the total return over those nine years was a fraction of the profit growth that occurred. That implies plenty of room for a catch-up move higher that could be quite substantial. What is Griffon really worth? The stock's typical price-to-earnings (P/E) multiple ran about 22.1x with a good bit of variation. As of June 27, its multiple was just 8.1x the current year's estimate. That's the lowest ever if you throw out the momentary Covid-panic low during March 2020. Brave souls who bought back then saw Griffon essentially triple, rebounding from $9.20 a share to $27.53 within six months. All but one of Griffon's should have sold moments (red-starred below) came at P/Es north of 20x. The other peak represented 17x its Covid-year EPS. Assume just a 15x multiple on what is now projected for the current fiscal year and $49.35 becomes a reasonable target price by year-end. Yahoo Finance was too low on those previous two quarters. It might be a bit conservative again on its 12-month goal price for GFF of $44.80. Even so, hitting that level would deliver a return of greater than 68% plus dividends from here. Independent research house Morningstar labels Griffon a 5-star best buy. It declines to provide year-ahead target prices but does let us know what it sees as a present-day fair value for each stock it covers. As of June 27, that number sat at $39.94, implying a 46% undervaluation from Monday's closing price of $27.35. Quantitatively based FastGraphs is the most bullish of all on Griffon. It sees GFF's normalized P/E as 20.72x based on historical data. That's not far from what I calculated earlier. FastGraphs projects a fair value for Griffon of $55.05 by this fall and $57.75 by Sept. 30, 2023, if the stock only commands a 15x multiple rather than north of 20x. Either time period looks for more than a double, plus any dividends collected while waiting for the public to start appreciating Griffon appropriately again. Buying shares outright allows for unlimited upside potential, a reasonable yield and no preset time horizons. Option-savvy traders can nibble at the edges while assuming only a modicum of risk via naked put sales out to Jan. 20, 2023. Actual pricing on GFF's Jan. 2023 $25 and $30 strike price puts, with GFF at $26.61, is shown below. Shorting 10 contracts of the lower strike would bring in $2,600 while only committing to buy at a net price of $22.40. That same contract quantity employing GFF's $30 strike would have delivered $5,200 or so in option premium with a worst-case break-even of $24.80. Margins of safety ranged from 6.8% to 15.8% versus the trade inception share price of $26.61. Buy some GFF shares, sell some Jan. 2023 puts or consider doing both.

Griffon Corp.: Under-loved, Under-followed, Ready to Rumble

The maker of building products appears significantly undervalued based on its results and earnings prospects; here's how to play it.

Columnist Conversation

This Could Get Messy

Latest AAP Podcast With Helene Meisler!

This Weekend on Real Money

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.