Griffon: Betting On The Mythical Creature

| About: Griffon Corporation (GFF)
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Griffon Corporation (NYSE:GFF) looks poised to have substantial growth over the next several years. This small cap industrial play looks to have everything going in its favor when you look inside the year end numbers reported in November.

Even GFF suffered from the meltdown of the euro this past year and increased power of the US Dollar. Griffon is has a well rounded business model that revolves around general building materials. GFF's plastic products revenue decreased by 6% YOY. At first glance, why would anyone think that was a good sign? Look deeper. The volume of sales of Griffon's plastic products were actually up 3% YOY, but the unfavorable translation of European and Brazilian currency into a stronger US Dollar caused a 9% unfavorable impact on the bottom line. With the EU is beginning to solidify, and the Fiscal Cliff still an ongoing concern, the New York based company should see the increased sales translate in to a real increase on the bottom line for its plastic products.

The home and buildings segment of Griffon's business saw a decline of 5%, or $10.6 million, due to lower snow tool sales. The unseasonably warm winter last year left GFF's customer base with a glut of product left to use for this winter. Take into account the thunderous snow storms that have moved across from the Midwest through the northeast, shortly followed by another snow storm that originated in Texas, moved through Alabama, then up the East coast. Little Rock, Arkansas saw ten inches of snow on Christmas day alone. The state typically doesn't see half of that snowfall in a single year, much less a day. As such, the state uses sand on roads to give vehicles' tires something to grip, as opposed to using salt which, actually helps eliminate ice and snow from the roads. This winter has been much harsher than last year so far, and Griffon should see an uptick in snow tool sales come this time next year as clients exhaust the glut of tools on hand.

GFF's buildings segment also saw an uptick in the sales of doors. Why should any investor care about a few extra doors being sold? Its quite simple really. I have spoken with a contractor who services the entire Chicagoland area, from Lake Geneva, WI, to Chicago, IL. Around the House Restore stated that the quality of construction on new homes overall during the housing boom was extremely poor. They have been forced to replace, and notify housing association boards that doors, caulk, and countless other items needed to be replaced or addressed. The homebuilders were able to slap homes up and reap massive profits before the poor craftsmanship caught up to them. Around the House Restore has seen homes without weather proofing around doors or windows, decks built well below code, stairs that were never attached correctly. All of these items can be corrected using Griffon's building products. The housing boom lasted from 1998-2006. Between 2005 and the end of 2007 alone, roughly 3 million homes were built in the United States. That is a massive amount of opportunity for Griffon to capitalize on.

A close look at the fundamentals on GFF show some mixed signals, but improvements in the macroeconomic outlook should help make the numbers more appealing. Griffon's TTM gross margin is 50 basis points higher than the five year average. TTM gross operating margin is 100 basis points higher than the five year average, and GFF's TTM net margin is also 100 basis points higher than the five year average. Those numbers are very favorable for the business considering the recent quarter's external factors we previously discussed. Currently, Griffon has a P/E of 35.67, a PEG of 1.66, a P/S ratio of .33, and a Forward P/E of 18.14. While the PEG and current P/E look a bit askew, the Forward P/E is close to being in line with the DOW consensus of a 13 Forward P/E. Also, the P/S being a paltry .33 shows me that with some tweaking of Griffon's expenses, GFF could increase profitability.

Griffon is not for the weak of heart. As true with most small cap plays, GFF has a Beta north of 1, and should not be viewed as a safe haven. According to the earnings release cited earlier, the company has more than enough cash to operate through 2013 and 2014. If you tend to be more of an aggressive trader, you may want to consider the words of Gabelli on CNBC stating that Griffon could split into pieces to bring shareholders value.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: Investing always involves risk. As such, never invest more than you can afford to lose. Always consult with a licensed financial professional before adding a new position to your portfolio.