Looking for value in extended bull markets often means gravitating to industries and sectors that have fallen out of favor with the broad market. In a COVID-19 world, it has seemed a bit ironic to see the market not only reclaim its losses from its early year plunge to bear market lows, but then to see it push well past those previous highs to set new highs at multiple points over the last few months.
I believe that part of this, not surprisingly has to do with the enthusiasm and hope that has come from positive news on the vaccine front, as Pfizer was granted emergency use authorization for its vaccine last week, and now Moderna is on deck, with its vaccine expected to receive FDA clearance before the end of business on Friday.
With infections still on the rise around the globe, and big segments of people apparently refusing to follow health guidelines around social distancing and mask-wearing, it appears clear that pandemic exhaustion has set in and is overriding common sense and basic social courtesy. That means that these first vaccine approvals have been a long time coming, and finally offer a ray of hope that business, and life can actually start to return to some sense of normalcy.
One of the areas of the economy that has held up surprisingly well this year given pandemic-driven uncertainty is the building segment of the Industrial sector, including home and commercial builders. Prices for new homes have continued to go up in many areas of the United States, which is a sign that demand remains high. That’s a good thing for the stocks that operate in this space, large and small alike.
Today’s highlight covers a less-well-known, small-cap name in the Building Products industry. Griffon Corp (GFF) operates in a few different segments of the industry, including home and building products as well as in Defense Electronics. This is a company that has increased critical fundamental metrics like Free Cash Flow and Net Income throughout the year in spite of the uncertainty and challenges associated with navigating pandemic conditions. The stock also offers an interesting, attractive value proposition despite the fact that has more than doubled in price since finding its own March, bear market low at around $9. Should you keep this stock on your watchlist? Let’s run the numbers and let you decide.
Fundamental and Value Profile
Griffon Corp is a diversified management and holding company that conducts business through its wholly-owned subsidiaries. The Company operates through three reportable segments: Consumer and Professional Products (CPP), Home and Building Products (HBP) and Defense Electronics. CPP segment consists of AMES Companies, Inc. (AMES), which is a manufacturer of branded consumer and professional tools and products for home storage and organization, landscaping, and enhancing outdoor lifestyles. HBP segment consists of Clopay Corporation (Clopay), which is a manufacturer and marketer of residential and commercial sectional garage doors and rolling steel doors in North America. Defense Electronics consists of Telephonics Corporation (Telephonics), which is a provider of surveillance and communications solutions for defense, aerospace and commercial customers.DKS’s current market cap is $1.1 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased 10%, while sales improved by nearly 15%. In the last quarter, earnings declined -25.4%, while sales increased by a little over 4.5%. GFF operates with a narrow margin profile that appears to be strengthening; over the last twelve months Net Income was about 2.22% of Revenues, but increased to 3.04% in the last quarter.
Free Cash Flow: GFF’s free cash flow is healthy, at about $88.3 million billion over the last twelve months. That translates to a Free Cash Flow yield of 8.19%. It should be noted that Free Cash Flow increased from the beginning of the year, and pre-pandemic when it was around $58 million.
Debt to Equity: DKS has a debt/equity ratio of 1.48. This is a high number that suggests the company is highly leveraged; but this isn’t unusual for stocks in this industry. Their balance sheet $218 million in cash and liquid assets versus a little over $1 billion in long-term debt. While their operating margins are narrow, they are sufficient to service the debt the company carries.
Dividend: DKS pay a dividend of $.32 per share. That translates to an annualized yield of 1.56% at the stock’s current price.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target for DKS at around $29 per share. That means that at the stock’s current price, it is significantly undervalued, with about 41% upside from its current price.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The chart above displays the last year of market activity for GFF. The red diagonal line traces the stock’s upward trend from a bear market low in March at around $9 to its late July, temporary peak around $27.50. From that point the stock has hovered in a range between $19 at the low end and almost $25. The stock is currently sitting on top of the 38.2% retracement line at around $20.50, which is where I’m putting immediate resistance, with support back at around $19. If the stock can break above this current level, and follow through with another higher move, it should have near-term upside to about $24.75. A pivot and move back below $20.50 should find support anywhere between $18 and $19 per share, with additional downside to around $16 if bearish momentum picks up.
Near-term Keys: GFF an interesting stock in the Building Products industry, and worth keeping on a watchlist; the value proposition is certainly interesting enough that it is worth a long look as a potential long-term investment. If you prefer to focus on short-term trading strategies, you could use a push above current resistance at $20.50 as a signal to buy the stock or work with call options, using $24.75 as a useful bullish target. If the stock pivots off of resistance and starts to move lower, you could consider shorting the stock or buying put options, but keep in mind that downside appears to be significantly less than upside; quick profits should be taken between $18 and $19 unless bearish momentum clearly picks up and pushes the stock down to next support at around $16.