GFF - Griffon Corporation: Avoid It For Now

2023-08-30 02:28:17 ET

Summary

• Griffon Corporation posted disappointing Q3 FY23 results, with a decline in revenue and income from continuing operations.
• The weak housing market in the U.S. is expected to impact GFF's revenue in the coming quarters.
• The Company has underperformed compared to its peers in terms of revenue growth and valuation, making it an unattractive investment option.

Griffon Corporation ( GFF ) provides home and building products worldwide. GFF posted disappointing Q3 FY23 results. I will review its Q3 FY23 results in this report. The housing market in the U.S. is not doing great, and I think this might affect the company. In addition, its growth hasn't been impressive compared to its peers. So, I don't see any value in GFF for now. Hence, I assign a hold rating on GFF.

Financial Analysis

GFF announced its Q3 FY23 results . The revenue for Q3 FY23 was $683.4 million, a decline of 11% compared to Q3 FY22. I think underperformance in its consumer and professional products [CPP] segment was the major reason behind the revenue decline. The revenue from the CPP segment declined by 22.1% in Q3 FY23 compared to Q3 FY22. I believe higher customer inventory levels led to a decline in volumes, which I think was the reason behind the underperformance in its CPP segment. However, its gross profit margin improved in Q3 FY23. The gross margins in Q3 FY23 was 40.1%, which was 34% in Q3 FY22. I think a favorable product mix and lower material prices were the major reasons behind the improvement in gross margin.

Its income from continuing operations in Q3 FY23 was $49.2 million, a decline of 6.7% compared to Q3 FY22. In my view, the financial result of GFF was quite disappointing. My expectations of the company doing good in the coming quarters are quite low. I think we might see underwhelming results in the coming times. I am saying this because I don't think the housing market in the United States is doing very well. The people in America are unwilling to enter the housing market, and the reason might be an increase in mortgage rates. The mortgage rate reached 7.36% in the month of August, which is the highest since 2000. This might be the reason for the decline in mortgage applications for home purchases. The current mortgage applications are the lowest in the last 28 years . This shows that the people of America are not willing to buy houses. Hence, I believe this is a major red flag because this might affect the company's revenue in the coming quarters to a great extent, which I think might adversely affect its share price. So, I am not too optimistic about the upcoming quarterly results.

Technical Analysis

GFF is trading at the $39.7 level. I think there is one benefit of technical analysis that I like very much. If there is a problem in a particular company or industry that is not known to the public, the technical chart can predict or show us that there might be something fishy. GFF is trading near its all-time high of $43.9, and you might think that this stock is in good momentum and might continue to run upward. But I have a different opinion. I am bearish on GFF after looking at the price chart. It has formed a double top pattern in a monthly time frame, which is the strongest and the most reliable time frame. It has formed a double-top pattern at an all-time high, which is not a good sign. In addition, if we look at the July month's candle, we can see that it gave a solid breakout, but the next candle was a red one. So there is a high chance that it might be a fakeout. Hence, seeing the price action, I believe we might see a trend reversal from here because a double-top pattern is a simple but effective pattern. Hence, looking at the price action, I am bearish on GFF.

Should One Invest In GFF?

Their quarterly result was disappointing, and looking at the adverse housing market condition, I don't think we might be able to see strong revenue growth from GFF in the coming quarters. In addition, if we compare it to its peers, we will see that GFF has underperformed when compared to its peers. Its peers like Tecnoglass ( TGLS ), Janus International Group ( JBI ), and Gibraltar Industries ( ROCK ) have a three-year revenue [CAGR] of 30.4%, 21.72%, and 15.77%, respectively, whereas GFF has a three-year revenue [CAGR] of 5.85%. So, the growth rate of GFF hasn't been impressive when compared to its peers.

In addition, if we look at its valuation. GFF has a P/E [FWD] ratio of 24.94x compared to the sector median of 20x. So, even valuation-wise, I don't see any opportunity in GFF. So, after looking at the weak housing market trend, high valuation, comparing its performance to its peers, and weak financial results. I don't think there is any value in GFF. Hence, I would advise avoiding GFF for now.

Risk

Due to the seasonality of the AMES and HBP industries, Griffon's revenue and earnings are typically lowest in Q1 and Q4 and highest in Q2 and Q3. The second and third quarters of 2022 saw 58% of AMES' sales, up from 53% in both 2021 and 2020, with the addition of Hunter Fan. Renovation and construction during the summer months, which are often at lower levels during the winter months, are what drive HBP's business, typically in the second quarter. Weather, particularly weekend weather during the busiest gardening season, has an impact on consumer demand for lawn and garden supplies. Certain weather patterns, like unseasonably cool or warm temperatures, hurricanes, or water shortages, could harm AMES' sales volumes. Additionally, the sale of some AMES items, such as snow shovels and other snow tools, may suffer from a lack of snow or below-average snowfall during the winter season. As a result, the operational, financial, and cash flow results of AMES can all suffer.

Bottom Line

I don't see any value in GFF for now. The housing market in the U.S. is weak, and I think it will take some time to recover. So, I think weak market conditions might affect the company's growth. In addition, when compared to its peers, its performance hasn't been impressive. So, looking at all the factors, I assign a hold rating on GFF.

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