It's Hard To Reconcile Griffon's Valuation With The Fundamentals

There's no one right way to analyze a company, and it can sometimes be "penny-wise and pound-foolish" to ignore a company just because it doesn't have a certain minimum ROIC or meet some other arbitrary statistical hurdle. So although Griffon's (NYSE:GFF) history vis a vis margins and returns on assets, equity, and capital, isn't great, it's not necessarily a deal-breaker for a company with good share in its core home and building business, and decent businesses in its other operations.

The deal-breaker for me is the valuation relative to the growth and outperformance prospects. Even if I assume that EBITDA margins can improve from a prior run rate in the mid-single digits and a more recent run rate in the high-single digits into the low-to-mid teens, and I assume a lower tax rate, and I assume a steady level of capex spending (despite growing revenue), I still can't get to a compelling fair value today. While there is a lot of leverage in this model (operational and financial) and I expect free cash flow generation to meaningfully improve (and likely be re-invested into the business through M&A), I just don't see the undervaluation or sufficient reward for the risks.

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It's Hard To Reconcile Griffon's Valuation With The Fundamentals