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A Little Conglomerate that Could Bring Outsized Gains
By
Michael Brush
August 25, 2005
Back in June, insiders at Griffon (GFF)
– a mish mash of unrelated businesses -- bought enough shares of their own
company to make the stock look like a decent bet.
But then the stock shot up quickly to almost $26 from near $22 where
insiders had finished buying. So I filed Griffon under “the one’s that got
away.”
Since then, Griffon shares have come down and persistent insiders were back
at it – so I’d say it’s time to jump in, too.
Griffon is an odd assortment of businesses that don’t make much sense
together, almost in the style of a 1960s conglomerate. But a few of them
seem poised for decent growth. Here’s a look.
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* Specialty plastic film About 29% of Griffon’s revenue comes from
selling the plastic film coating put on the backs of diapers. Griffon
supplies all the film to one major manufacturer in North America and Europe.
Griffon suffered over the past several months in part because a diaper
redesign cut back on the amount of plastic film put in diapers. But that’s
in the past, and there’s good news for Griffon in this division. The company
is in the process of adding new capacity this year in Germany and Brazil.
Once it books fresh sales and starts filling out that capacity, profit
margins should start moving up. I suspect insiders are buying in large part
because of the favorable potential here, over the coming quarters. Griffon’s
film backing is also used in feminine napkins and certain kinds of clothing
worn by health care workers.
* Garage doors Griffon gets about 56% of its revenue by selling and
installing garage doors. This seems like a scary business – at a time when
everyone is worried about a housing bubble. But I wouldn’t be too concerned
about this, for a couple of reasons.
First, so many people are worried about a housing bubble, almost by
definition one cannot exist. Bubbles occur when the crowd jumps on a theme –
and the crowd right now seems too worried about a bubble, even if home sales
are remarkably strong.
Second, with inflation so tame – thanks to downward pressure on prices
because globalization has opened up the workshops of India and China to the
world – there’s less chance long-term interest rates will move high enough
(above 8%) to kill off housing demand.
Next, Griffon doesn’t carry inventory and its labor costs are flexible. So
it can cut costs fast if housing demand slows down. Finally, the company
estimates 75% of its doors are actually used for replacement or remodeling.
A lot of that kind of activity has been funded by mortgage refinancing,
which will cool off as interest rates nudge up. This is a risk. On the
bright side, if housing turnover slows, remodeling may increase, as people
stay put instead of moving to a new house.
* Communications systems Griffon also gets about 16% of its revenue
by selling secure digital communications systems used in aircraft, and radar
systems. The company has a billion dollar contract to sell military gear
like this to U.S. armed forces – a contract that should bring in revenue
over the next ten years or so.
The bottom line: Griffon is exposed to the vagaries of resin and
steel prices – which bounce around a lot since they are commodities. So
expect volatility with this stock. On the bright side, the company has lots
of cash ($88 million) and a solid balance sheet. So it has staying power.
Analysts at Legg Mason Wood Walker believe the stock could trade up to $33
in a year – which would bring a 34% gain for investors who buy now.
Disclaimer
At the time of publication, Michael Brush did not own or control shares in
any of the companies listed in this column. Mr. Brush is an independent
columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About
Insiders Corner:
http://www.investorideas.com/insiderscorner/. InvestorIdeas.com
Disclaimer:
www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not
affiliated or compensated by the companies mentioned in this article.
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