The conglomerate discount is a market phenomenon that occurs when the value of a conglomerate is lower than the sum of the values of its businesses. This is because investors are concerned that the performance of one business could drag down the entire group. Griffon Corporation (GFF) is a conglomerate that has been impacted by this phenomenon, with both equity markets and credit markets applying a discount to its value. In today’s FA Alpha Daily, we’ll use Uniform Accounting to assess GFF’s true credit risk, comparing it to what credit rating agencies suggest.
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Conglomerates are large corporations that own and control diverse businesses across different industries.
These companies are more complex and potentially subject to inefficient management across a set of various industries and businesses.
Even if that’s not the case, some businesses in the portfolio of companies may perform well and others may not, depending on economic cycles.
This situation usually leads to lower investor confidence and valuation in the stock market, resulting in an economic concept called the “conglomerate discount”.
One of the victims of the conglomerate discount has been Griffon Corporation (GFF).
The company makes home and building products including fans and storage and organization products for residential, industrial, and commercial use.
Also, it is the largest manufacturer and marketer of garage doors and rolling steel doors in North America.
Additionally, it has made things like microphones and radars for the Navy for 90 years but divested that business last year.
The conglomerate is also seeking strategic initiatives to spinoff or divest from some of its businesses in order to focus more on home improvement space.
So, it’s a conglomerate… but it’s a sleepy one at that.
Its primary business, home and building products, is not in an exciting or high growth industry as well, but it’s not a dying business.
This means the company doesn’t typically have amazing returns, but it is doing well enough to finance its operations pretty easily.
However, rating agencies seem to miss that fact.
S&P, for instance, thinks that it’s just a conglomerate, has dying businesses in its portfolio, and will have difficulty with meeting its obligations in the next few years.
Due to these factors, S&P gave a B+ rating to the company, implying a chance of default of around 25% and placing it among the lowest tranches of the high-yield basket.
We think that Griffon doesn’t deserve this double down conglomerate discount, at least not on the credit side. The company only has one debt maturity in the next five years, and it should have plenty of cash flow to cover that.
This rating is unreasonably low, let’s take a look…
We can figure out if there is a real risk for this company by leveraging the Credit Cash Flow Prime (“CCFP”) to understand how the company’s obligations match against its cash and cash flows.
Griffon only has about $1 billion in debt coming due in 2028. Despite being a sleepy business, it’s one that should keep having the cash flows necessary to keep the lights on in the coming years, and it should be able to service all its debt down the road, or refinance, as necessary.
It also has lots of cash flows to service all obligations going forward, including a debt maturity in 2028.
In addition, unlike typical conglomerates, Griffon is taking steps to focus its efforts into a specific industry.
Because of these reasons, at Valens, we think that Griffon does not deserve to be among the lowest of high-yields and should have a much safer credit rating.
That’s why we are giving an IG3+ rating to this company. This rating only implies a probability of default of around 1% and places the company in the investment-grade basket.
It is our goal to bring forward the real creditworthiness of companies, built on the back of better Uniform Accounting.
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Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research
This analysis of Griffon Corporation (GFF)’s credit outlook is the same type of analysis that powers our macro research detailed in the member-exclusive FA Alpha Pulse. To learn more about FA Alpha, follow us on LinkedIn.