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.
Continue here:
It's Hard To Reconcile Griffon's Valuation With The Fundamentals
