Griffon Corporation

Moat: 2.5/5

Understandability: 3/5

Balance Sheet Health: 3.5/5

Griffon Corporation is a diversified management and holding company that conducts business through wholly owned subsidiaries. Griffon operates in two segments: Home and Building Products (HBP) and Consumer and Professional Products (CPP).

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Griffon is an acquisitive company, as shown by their history of purchasing multiple companies. It has operations all over the US, Canada, Europe, Asia, and New Zealand.

Business Overview

Revenue Distribution

Griffon’s operations are divided into two segments:

  • Home and Building Products (HBP): This segment manufactures and markets branded building products for residential and commercial construction, as well as for remodeling, replacement, and home improvement applications. Key products include garage doors, rolling steel doors, and fire-rated doors.
  • Consumer and Professional Products (CPP): This segment manufactures and markets branded consumer and professional products for home, personal, and industrial use, such as cleaning products, tools, and other related solutions.

HBP made up 64.9% of net sales, while CPP constituted 35.1% of total revenue during the fiscal year 2022.

  • Construction Market: The HBP segment is heavily reliant on the strength of construction markets. Any slowdown in residential or commercial construction can negatively impact the demand for Griffon’s products. Recent volatility in mortgage rates and reduced housing starts are creating headwinds for the business.
  • Consumer Spending: The CPP segment is linked to consumer spending habits. Discretionary spending on home products can fluctuate with overall economic health and consumer confidence. However, these products also have a level of non-cyclical demand as they can be essential for daily life.
  • Raw Material Prices: Both segments are exposed to fluctuations in raw material prices, such as steel and plastic, that can significantly affect cost structures and profitability.

Competitive Landscape

  • HBP: The HBP market is generally competitive with several regional players and some larger national players. Competition is mainly based on product features, price, service quality, brand loyalty, and distribution networks. Many are smaller family businesses and are regional.
  • CPP: The CPP segment faces strong competition from other companies, some of which possess larger brand recognition and wider distribution channels. New entrants can offer innovative products or cheaper options, adding to the existing competition.

What Makes Griffon Different

  • Diversification: Griffon operates in diverse industries, spanning building products and consumer goods. The diversification across segments can provide a degree of stability and offset the impact of fluctuations within each individual segment.
  • Brand Portfolio: Griffon possesses a portfolio of strong brands with a focus on innovation and creating value through its products.
  • Focus on Operational Excellence: The company emphasizes improving its operations, supply chain management, and cost controls to enhance profitability.

Financials

Revenue

  • Griffon’s revenues have seen a recent decline, from $2,604 million in 2022 to $2,193 million in 2023. The primary factors contributing to this revenue decline was volume contraction across HBP as well as lower sales from its subsidiaries including Home and Building Products. Revenue was 2.3 billion in 2024.

Margins

  • Gross profit has fluctuated between 24.9% and 27.2% between 2020 and 2022.
  • EBITDA has fluctuated a bit, showing volatility, but was around 10% for 2021 and 2022. It was 11.7% in 2023.
  • Profit margins are usually driven by cost management as it’s an essential driver for the business.

Leverage

  • The company utilizes an asset-backed credit line, with around $442 million outstanding.
  • The debt-to-equity ratios were higher in the period following acquisitions as they took on more debt.
  • The company is currently repaying debt, which has been a focus of the management.
  • Debt to adjusted EBITDA is around 4.5x currently.

Cash Flow

  • Free cash flow has been positive, although fluctuating a bit year to year.

Management has stated a strategic priority on debt reduction and improving free cash flow by focusing on organic growth.

Moat: 2.5/5

Intangible assets: Although Griffon owns a variety of brands, their brand recognition may not be as strong as bigger firms in the sectors they compete in. Cost advantages: Through their experience and strong operational focus, Griffon does have cost advantages and can compete using economies of scale. Switching costs: Many of the products they sell, have switching costs, as most clients would have to reengineer their production to replace Griffon’s products.

Based on these, we can give Griffon a moat rating of around 2.5, due to some characteristics that allow it to create profits over a prolonged time frame.

Risks

Legitimate risks that could harm the moat and the business resilience:

  • Economic Downturn: As mentioned before, both the CPP and HBP segments can be significantly affected by an economic downturn. If that would occur, consumer spending would decrease, leading to a reduced demand of their products. Construction can also be halted, resulting in fewer purchases.
  • Raw Material Price Increases: As both segments use materials with variable pricing, this is an aspect that can significantly impact profits. The price increases could be passed down to customers, but there are limitations. It also reduces overall consumer spending and therefore demand for all products.
  • Integration Challenges: As Griffon frequently purchases companies and adds them to their portfolio, they have to effectively implement new strategies across different subsidiaries. Failure to do this can result in value destruction.
  • Geopolitical Risk: As seen, a large portion of revenues come outside of the U.S. This means that geopolitical risks are at play and are important factors for future growth and projections.
  • Competition: As they are an acquisitive company, this also creates risks. They have to find companies at prices that are good and do not overvalue the acquired company. If they can not find these companies, or buy them at expensive valuations, there might be a long-term negative impact on their businesses’ results.

Business Resilience

  • Diversified Operations: The company’s presence in multiple sectors mitigates the impact of economic downturns for any one sector. This should allow the company to have a level of resilience.
  • Focus on Long-Term Value: Management’s focus is also on generating long-term value. If their strategies are implemented well, they could produce above average performance.
  • Cash management: With the management focusing on deleveraging, they will be able to weather financial storms better, making the overall company more resilient to major economic downturns.

Understandability: 3 / 5

The business model is relatively straightforward when broken down into the two main segments, however analyzing the performance of all different sub-segments and making a forecast from it is complicated. Due to the several subsidiaries and the different areas that the businesses are in, they are inherently difficult to understand on a deeper level.

Balance Sheet Health: 3.5 / 5

The company’s balance sheet is stable with decent debt ratios, especially in comparison to their industry competitors. They have recently focused on deleveraging and improving their financial health, making it more stable and therefore slightly more healthy. They also have a consistent stream of revenue, even if it fluctuates slightly, which gives the company stability. While not perfect, the management has also committed to continued growth, creating a basis for future growth and profitability.

Recent Concerns / Controversies and Problems

  • During the call, there was a repeated questions from analysts of management’s decision to deleverage instead of acquiring more companies. Management is firm in this view as they believe focusing on organic growth will have higher value in the long term.
  • The company has mentioned that their revenues have declined from the same period last year. This is due to the reduced consumer spending and reduction in the housing market.
  • Inflation and interest rate hikes are a concern, but those effects have been minimized through internal controls.