Short Pitch: Griffon Corporation

Mismanaged Overearner with Substantial Margin Risks

A note: I initially diligenced Griffon Corporation and entered into a short position at the end of July. Griffon reported underwhelming Q3/24 earnings on August 9th, occurring before I could complete my writeup. However, the recent gains in share price, along with the lack of substantial sell-side downward revisions for Q4/FY25, lead me to conclude that the thesis is live going into Q4/FY25. As always, not investment advice, please do your own due diligence. Any comments & feedback is highly appreciated.

Griffon Corp (NYSE: GFF) is potentially overearning & presents an attractive short opportunity. Griffon is an industrial conglomerate whose main business—producing commoditized garage doors through its HBP (Home Building Products) segment—currently earns over 2x pre-Covid EBITDA due to Covid-era supply chain issues & price inflation. As margins appeared to stabilize in 2023, investors believe that this margin expansion is permanent. However, poor macro, channel checks & web-scraped data indicate that garage door pricing is under increasing pressure, creating a likelihood of substantial margin contraction & 30%+ downside to earnings.

I. Business & Industry Overview

Griffon Corporation is an American holding company which manages two separate businesses, the home building products (HBP) and consumer / professional products (CPP) segment. HBP is one of the largest US manufacturers of garage doors, operating as Clopay (residential doors—56% of segment revenues) and CornellCookson (commercial doors—44% of segment revenues). This segment contributes >90% of total EBITDA due to elevated margins. The CPP segment manufactures a variety of consumer tools & equipment including power tools, fans, and closet shelving. Due to the small earnings contribution, I do not discuss this segment in this writeup and assume sell side estimates for modeling purposes.

Clopay and CornellCookson operate predominantly in the United States, typically selling in bulk to distributors who then sell to consumers & businesses. Larger distributors often negotiate for favorable pricing, locked in short-term contracts. Clopay competes against large firms incl. Overhead Door, Amarr and CHI Garage Doors, plus numerous smaller competitors, and is the largest firm by market share. CornellCookson is one of the top 5 commercial garage door firms. The garage door industry is fragmented w/ dozens of smaller regional manufacturers; competition occurs primarily on price, since garage doors are commoditized products.

II. Background & Thesis Overview

In the pre-COVID era, the HBP segment had low-teen EBITDA margins; now, the HBP segment makes >30% EBITDA margins, resulting in segment EBITDA more than doubling. Two consecutive years of supply shortages and delays led garage door OEMs to increase their prices, with distributors passing these prices to consumers. At first, investors were skeptical, but as margins held through FY23, the stock rerated to all-time highs. Griffon’s stock currently trades at a decent multiple of 9.5x LTM adj. EBITDA, towards the higher end of its 5Y historical range. The stock has appreciated 200%+ in the last year and is rated “strong buy” by 4 of 5 covering sell side banks, and is also often mentioned as a long investment within online forums, substacks, & VIC.

The long case is predicated on declining interests rapidly lifting consumer demand & stabilizing prices, leading  garage door OEMs to maintain a “rational oligopoly” to keep prices where they are now. Investors also view the company as a ‘reformed’ business, with management’s terrible historical track record eclipsed by a ‘successful’ proxy fight with activist investor Voss Capital. Based on the following research, I view these theses as questionable at best, with huge downside potential. This pitch includes the following theses:

Thesis I. Demand Pressure & Increasing Price Competition will Compress Margins. Management’s upbeat guidance for FY24 is overshadowed by low door demand in both sectors. Channel-check calls reveal consumer demand pressure and mix changes impacting demand for doors.

Volume pressure leads to pricing pressure—webscraped data reveals Home Depot, Griffon’s largest distributor, to be doing discounts in peak season. Competitor OEMs could drop pricing for volume & distributor wins—one large competitor has already done so—likely forcing Griffon to do the same.

Thesis II. Misplaced Confidence in Shady Management Team & Proxy Fight: Street trusts management’s explanation of Q3 earnings miss—that steel prices were a headwind—while indices appear to have moved the other way & steel represents a small part of total costs. 

While street has gained confidence in the company post-proxy-fight, most fundamental issues with the company remain unsolved. CEO Ronald Kramer is still overcompensated, strategic reviews for HBP were terminated with no outcome, and multiple insiders were simultaneously selling shares for the first time since pre-Covid.

III. Demand Pressure = Price Competition = Margin Pressure

“We expect residential to continue to be strong and volumes to be better than the prior year.” (Griffon CFO, Q2/24 Earnings Call)

For the most part, investors are taking management’s words at face value, given that management has historically given conservative forward-looking projections. And yet, most forward indicators of growth indicate that FY24 garage door demand is down YoY. Most of Griffon’s residential revenues come from renovations & remodeling, when homeowners replace existing garage doors. Primary leading indicators of renovation activity include new home starts & the LIRA (“Leading Indicator of Remodeling Activity”), both of which are down in FY24.

The LIRA forecasts remodeling spend to be down mid single-digits YoY for Q4/24 and early 2025; while overall new home starts are positive, single family home starts are down nearly 8% from the start of the year. And while interest rates are set to decline, these decreases only impact R&R spending after some time delay; for instance, observed remodeling spend only began slowing in Q4/23 though rates had risen for over a year at that point.

Combined with typical seasonal demand declines in FQ4 (ended September–most garage door spending happens in the spring & summer during periods of warmer weather), Griffon’s total Residential R&R volumes are likely under growing pressure, which will not abate until Spring 2025 or later.

On the commercial side, Griffon’s management has conceded that demand has been low (down c. 4-5% YoY) due to low commercial real estate investment & spending. Overall commercial new build starts are fairly low, and demand has been fairly depressed: the FRED database for total commercial construction spending is down 14.4% since spending began to fall in October 2023.

Therefore, both residential & commercial spending demand is depressed & unlikely to improve in the near-term. Yet Griffon has reported slight growth in volumes over the past 3 quarters. Sellside attributes this to Griffon taking market share from competitors, but in my view, this is likely only a small contributor:

III.A Mix Shifts

Griffon provides no data on average selling price or % change in volumes, but mix shifts may explain their consistent volumes over the last 9 months. As consumers’ spending power & renovation budgets decrease, they would logically look at installing a lower-priced garage door. While the specific margin profiles of different doors is impossible to quantify, Tegus calls indicate that lower-priced “starter” doors generally bring in lower margins.

To learn more about this possibility, I got on the phone with 7 different Griffon Master Authorized Dealers, their highest class of distributor with highest volumes and lowest pricing. Of the seven dealers, four mentioned seeing demand contraction to an extent this year; two mentioned seeing consumers often opt for cheaper doors. For instance, I spoke with a representative at United Garage Door, Cleveland:

“There has been a transition towards a normalized market. A lot of potential buyers are keeping doors for longer & maintaining as opposed to buying new, and when they buy, they’re often opting for the cheapest option available. Volumes have been steady but the price mix has changed.” (Sales Representative, United Garage Door, Cleveland, OH)

To this end, Griffon Corporation blamed part of their Q3 earnings miss on mix shifts:

“Home and Building Products revenue declined 2% due to unfavorable product mix with increased residential volume being offset by decreased commercial volume.” (Griffon Q3/24 Earnings Call)

When asked by a bank analyst for further detail regarding mix shifts, management answered that “we see slight buy down in the retail channel.” Keep in mind that Griffon’s 3rd fiscal quarter, ended June, is typically the strongest quarter in the year due to Spring demand for garage door replacements. If mix shifts are happening during this typically-strong quarter, wouldn’t it logically follow that more (unfavorable) shifts are coming?

III.B Discounting

The small body of research on Tegus indicates that small door dealers are already discounting to maintain volumes since late 2023:

“So, retail pricing for the customer, we're seeing that most of the larger, more sophisticated [distributors] are still holding price, but smaller, less sophisticated companies continue to be more aggressive with price cuts in an effort to maintain business.” (President, A1 Garage Door Service, 9/23)

But original data I examined from Home Depot indicates that the larger players may be starting to discount too. For context, Home Depot is Griffon’s single largest distributor channel, representing c. 8% of total garage door sales. I examined historical Home Depot pricing data for a number of Clopay Doors from the price tracking site pricetracker.wtf, which collects a year of historical pricing data for Clopay garage doors.

The results are interesting: the chart above shows pricing data for 7 different types of Clopay doors with a full year of data. The data shows a number of trends: (1) Black Friday discounts in November 2023, (2) Christmas discounting in late December, then…. intermittent discounting that started in April and has continued through late-August 2024. Why would Home Depot need to discount in the summer? Some potential explanations, and my comments, are provided below:

1. Seasonality: Griffon’s management mentions that Q4 (ended September) is generally a weaker quarter in the year; however, the discounting began in mid-April, halfway through Griffon’s yearly peak quarter (Q3). Why would they need to discount halfway through the spring market?

2. Data anomalies: Given the size of the dataset, this is fairly unlikely. I examined nearly 20 doors in total and all exhibited roughly the same behavior from mid-April onwards.

It simply doesn’t make sense for Home Depot to be discounting midway through their peak selling quarter unless they were seeing a level of demand pullback that necessitated discounts. Within the 7 doors presented above, pricing is down c. 13.4% on average from September 1st, 2023, with the median discount being 15%.

III.C Pressure from Distributors & Competitors

Until Q3 earnings, compression did not appear on Griffon’s quarterly earnings. A number of experts on Tegus argued that no OEM discounts would occur this year, and that door dealers may attempt another 7% price increase this year. However, there is a multitude of evidence to the contrary, suggesting that pressure is mounting on OEMs to drop door pricing.

The first source of pressure is from distributors directly: Griffon’s largest door distributors, seeing negative volume comps and potentially pressured to discount by cost-cutting smaller dealers, will undoubtedly pressure Griffon to lower OEM pricing or risk losing their business. Griffon’s 30%+ EBITDA margins are a matter of public knowledge, providing distributors with substantial leverage to push for lower pricing.

Distributor pressure manifests itself to competitors dropping pricing. In a Tegus Call from July 2023, Amarr’s VP of Marketing mentions that smaller, regional garage door OEMs are already being aggressive in lowering pricing to gain market share:

“Because the market is somewhat soft, there are the regional players, the regional manufacturers are being very price aggressive across the board. And then the larger manufacturers are being price aggressive on a case-by-case basis, on an account-by-account basis. And so that's what's happening now.” (AMARR VP of Marketing, July 2023)

“The small manufacturers are maybe 5%, 10% lower already. And so then when they do a 10% decrease, now all of a sudden, they're 20% lower.”

Furthermore, one of Griffon’s biggest competitors, Overhead Door, reported negative pricing & margin comps in their CQ2/24 earnings (quarter ended June) through their parent company, Sanwa Holdings (5929.T):

Sanwa had previously reported in CQ1 that selling prices were down an average of 7% on a constant-currency YoY basis, and that they were making efforts to maintain selling prices.

With competitors dropping prices & pressure from distributors, combined with seasonal pressure in Q4 and Winter 2024/2025, it is a substantial likelihood that Griffon will need to drop prices. On a constant-volume constant-costs basis, every 5% reduction to average selling prices results in a -16% move to EBITDA. Griffon has massive downside exposure to garage door pricing, and just a 3% correction would place Griffon’s Q4/24 EBITDA well below street guidance.

V. Shady Management, Questionable Explanations

Griffon’s stock slid 22% after reporting Q3/24 earnings in early August, primarily due to HBP EBITDA margins coming in c. 100bps below street expectations. At the time, Griffon had the following explanation:

“We had some steel costs that will be—we know will be coming through in the third quarter, in particular, that will hurt margin a little bit from—sequentially.” (Griffon CEO, Q2/24 Call)

Management noted that there is some lag between when steel prices increase, and when such increases are reflected in Griffon’s PnL. Assuming this at face value, it makes sense to look at steel price movements 1-2 quarters in advance (see chart, next page). First, note that steel prices constitute a small amount of total expenditures: experts on Tegus have remarked that labor makes up an increasingly-large proportion of door manufacturing costs, and that steel costs should represent c. 10%-20% maximum of Griffon’s total door COGs (per a call with the president of A1 Door Service).

If we assume the absolute maximum—that garage doors are 20% of COGs—and also make the reasonable assumption that 70% of HBP’s operating costs (COGs + SG&A) are COGs, every +/- 10% movement to steel prices would have a proportionate c. 100bps impact on EBITDA margins (c. $3.5-4m US per quarter).

Based on the NYSE American Steel Index (above), steel prices increased an average of c. 5.6% from January 2024 through end of March 2024 (FQ2/24). This should in theory represent a >50bps impact to Griffon’s Q3 margins, which actually declined 2.8% QoQ. Even if steel prices declined 15%, roughly half of Griffon’s Q3 miss would have to be explained through other reasons. In my view, management’s explanation for the Q3 earnings miss is inadequate considering this fact alone.

Management guides for steel tailwinds in Q4. Indeed, the NYSEAmerican Steel Index is down 5.8% during the course of Q3, which would be c. +50 bps of margin expansion against any cost compression. While this may look like a cause for concern, bear in mind that 3% price compression would result in c. 220 bps of margin compression and a c. 10% decrease to EBITDA QoQ. In addition, as mentioned on Tegus, decreasing steel prices provides additional ammunition for distributors to push for price decreases, evidencing the primary thesis.

IV.A Can Management Even Be Trusted?

A lot of folks on the street generally trust Griffon’s guidance of 30%+ margins in Q4 because management has been historically conservative with guidance. There is, however, plenty of reason to be skeptical.

Management’s poor track record is fairly well-known in investor circles. CEO Ronald J. Kramer is the son-in-law of the son-in-law of Griffon’s founder, and formerly worked as an investment banker. For well over a decade, Kramer used the Griffon as his own personal piggybank, paying himself one of the highest salaries of any CEO within Griffon’s comparables group, plus a large amount of SBC that led to increases in DSO. Griffon’s board of directors was classified and filled with loyalists, allowing Kramer to run the company as his personal dictatorship. Griffon had also mismanaged their historical defense segment, with revenues declining from 2018 through 2022. It’s worth noting that HBP and CPP have independent management teams who handle day-to-day operations; thus, Kramer was being paid nearly $20m a year in cash and stock to sit around & do nothing.

These issues ultimately led to an board fight with activist investor Voss Capital, leading to the election of Voss’ independent director candidate, Charles Diao. I have linked the deck here, and it is quite helpful to understanding the historical issues at that point in time. Griffon agreed to make a number of substantial changes:

1. Divest the Defense Segment: chronically underearning and disadvantaged in a conglomerate setting;

2. Reduce C-suite Compensation: the C-suite made a total of $30m in 2021, representing a substantial portion of company-level SG&A expenses. Griffon also had an office in Manhattan that Voss saw as highly unnecessary.

3. Pursue a Sale of HBP: Voss believed the conglomerate discount could not be removed unless management pursued a sale of the HBP segment.

4. Improve CPP Margins: The CPP margin had been underperforming for a number of years, and management’s 2019 plan to “substantially raise margins” did little.

Fast forward a few years to mid-year 2024, and where are we?

1. Divest the Defense Segment: completed after years of value destruction for shareholders;

2. Reduce C-suite Compensation: Kramer ditched most of his SBC, but base salary grew to over $9m. While lower than 2021 highs (c. $30m total across C-suite), management was still compensated an industry-leading $22m in 2024, despite having little role in segment day-to-day operations. Total corporate overheads have actually grown nearly 10% from 2022 through 2024 (Q4 estimated) to nearly $60m a year… of fully unnecessary conglomerate expenses. (see appendix)

3. Sale of HBP: Strategic Alternatives abandoned after Griffon found their strategic plan was “better for shareholder interests.” There have been zero mentions of “strategic alternatives” (& related terms) in the past 3 earnings calls. No surprise—any sale of HBP would slash Kramer’s salary.

4. CPP Margins: Still a measly 5-6% on an adjusted basis. These “adjusted” margins exclude over $100m of inventory write downs that are a part of management’s “restructuring process”, plus over $100m of intangible impairments. Profitability remains poor, and management continues to promise higher CPP margins while failing to deliver.

And as for Voss Capital, they sold c. 70% of their position in blocks between Q3/23 and Q2/24, including a number of block sales straight to Griffon.

IV.B Suspiciously-Timed Insider Sales?

The cherry on top: over the past 6-8 months, management & insiders dumped a large amount of stock on the open market. Kramer himself sold $6.7m of shares, while 7 other officers (6 directors + the CAO) made open-market sales between $100 and $900k. Based on Bamsec & Refinitiv Form 4 records, this was the first time several directors had sold shares in the post-Covid period. Could it be a coincidence? Certainly. But I view the timing of these stock sales as highly suspicious, given the potential impending margin correction.

V. Catalysts, Risks & Hedging Considerations

The primary catalysts to this trade are the FQ4/24, Q1/25 and Q2/25 earnings results. I underwrite a c. 6% reduction to average selling prices split 2.5% in Q4 & 5% in FY25, which (given seasonally-adjusted constant volumes) leads to 24% downside to VA consensus FY25 HBP EBITDA estimates. Given the negative reaction to Q3 earnings, with the stock down 22% same-day, I see a substantial probability of similar events occurring in the next 2-3 earnings calls.

The primary risk to this trade is dramatic improvement to macro & interest rate expectations. While interest rate changes have little bearing on near-term garage door sales, Griffon will inevitably trade up w/ macro changes. I therefore recommend hedging this trade with an equivalent long position in companies with large housing macro exposure (e.g. real estate firms or other residential products manufacturers).

The other risk that is discussed (as a catalyst on the long side) is the risk of acquisition by a strategic or financial entity. I view this risk as nearly nonexistent, given the high possibility of EBITDA slippage NTM & management’s strong incentive to avoid acquisitions. Kramer’s salary is predicated on the lack of acquisition / strategic moves, and hence, it is hard to imagine management being proactive in engaging in strategic talks.

VI. Valuation

I value Griffon on a Discounted Cashflow basis, assuming a c. 6% decrease to ASPs through Q1. I assume street estimates for CPP & seasonally-adjust volumes for Q4 & FY25. The model is fairly simplistic and mainly aims to show the extent of downside possible with reasonable price compression. I assume the stock will rerate / trade at the post-Covid average of c. 8x EBITDA.

My valuation yields an implied share price of $43.39, representing 31% downside from the current share price.

VII. Model & Appendices

LINK TO DCF

Above: Management & CEO Compensation Data.

Form 4 Insider Transactions (Source: BamSEC)

Sensitivity Table (DCF) — WACC and EBITDA Multiple for FY28e EBITDA.