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Mario Gabelli Adds Griffon on a Better-Than-Expected U.S. Economy

March 06, 2014 | About:
Victor Selva

Victor Selva

9 followers

On March 4, Mario Gabelli (Trades, Portfolio), the chairman and chief executive officer of GAMCO Investors Inc. added Griffon Corporation (GFF) at an average price of $12.61 and currently holds 6,752,733 shares of the stock, worth 0.01% of his portfolio.

So let's take a look at this company and try to explain to investors the reasons this is an apparently appealing investment opportunity in the building products industry, which is a cyclical one and driven by the overall health of the U.S. economy.

Positive Outlook

The company is a diversified manufacturer of building products, electronic information and communication systems, and specialty plastic films. It has three segments: Home and Building Products; which manufactures and markets residential, commercial and industrial garage doors through Clopay Building Products, and provides non-powered landscaping products through Ames True Temper Inc.

The overall improvement in the U.S. economy and the housing market would drive Griffon’s Home & Building Products. The second segment, Telephonics, designs, develops and manufactures integrated information, communication and sensor system applications. Although there is some uncertainty with respect to government defense spending, we think that rising global demand for ISR products will benefit this segment.

Lastly, the third segment is Clopay Plastic Products Company, which develops and produces embossed, laminated and printed specialty plastic films used in a variety of hygienic, health care and industrial applications. This segment's major customer is Procter & Gamble (PG). It is expected that the increasing demand in emerging markets such as Latin American and Asian countries will contribute to better margins.

Operating Margin Is Expanding

Revenues for the three months ended Dec. 31, 2013 were $453.5 million vs. $423.7 million in the prior year (7% year over year). Operating income was $17 million, vs. $14.3 million for last year and net income was $3.2 million or $0.06 a share, vs. $0.6 million or $0.01 a share in the last year.

An Increase of 20%

The stock dividend yield is close to three-year high of 0.9%. Last January, the board of directors declared a quarterly cash dividend of $0.03 per share.

Valuation

In terms of valuation, the stock sells at a trailing P/E of 118.1x, trading at a premium compared to an average of 18.4x for the industry. To use another metric, its price-to-book ratio of 1.2x indicates a discount versus the industry average of 1.26x and the price-to-sales ratio of 0.38x is below the industry average of 0.84x. The last two metrics indicate that the stock is relatively undervalued relative to its peers.

Earnings per share (EPS) increased sharply in the most recent quarter compared to the same quarter a year ago and it has demonstrated a positive trend in the last five years. We include in the next graph the stock price because EPS often lead the stock price movement.

1394105227746.png

Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has decreased when compared to its ROE from the same quarter one year prior. This is a signal of weakness and is negative for investors.

Ticker

Company

ROE (%)

Industry Mean (%)

GFF

Griffon Corporation

0,6

5,2

AEPI

AEP Industries Inc

12,6

8,2

LMT

Lockheed Martin Corporation

7038,5

11,8

Competitors such as AEP Industries Inc. (AEPI) and Lockheed Martin Corporation (LMT) will be better options in term of ROE.

Final Comment

The firm's revenues rose more than 14% from the same quarter one year prior. This growth seems to boost the EPS as we have seen. Moreover, net income and net operating cash flow increased as well, demonstrating the improvement of the company´s strength.

I would recommend investors consider adding the stock for their long-term portfolios. Hedge fund gurus have also been active in the company in fourth quarter 2013. Gurus like Joel Greenblatt (Trades, Portfolio), Jim Simons (Trades, Portfolio), Richard Pzena (Trades, Portfolio) and Chuck Royce (Trades, Portfolio) have also invested in it.

Disclosure: Victor Selva holds no position in any stocks mentioned.


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