Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.
Unusual Options Activity: 3 Reasons to Consider a 63-Year-Old Holding Company’s Put Option
As I do for every article I write about unusual options activity, I look at the day’s trading to see if any patterns are emerging. I’m searching for anything that suggests options investors see something about a stock, industry, or sector that others don’t.
While we’re only two hours into Friday’s trading, I’m seeing unusual volume from the Griffon Corp. (GFF) Jan. 20/2023 $30 put option. Volume is 2,001 contracts, 83.38x the open interest, with a $140 premium.
Currently 15.5% out of the money, I’m intrigued by the unusual volume from this relatively unknown holding company, whose history dates back to 1959.
I’m a sucker for a good story. Here are three reasons to consider buying the company’s put option that expires in 63 days.
It’s a Business With Moving Parts
When I was a teenager, I would go to a bookstore in downtown Toronto that sold government publications. I was particularly fond of Inter-Corporate Ownership, the annual publication put out each year by Statistics Canada that highlights companies with annual revenues of CAD$200 million or more.
Statistics Canada used to publish a print edition but that’s long since died off. I make do with the online version.
Anyway, I mention this only because it reminds me how I became intrigued by companies with lots of moving parts. Berkshire Hathaway (BRK.B) has always been a favorite because it takes more than a little brain power to analyze all of its businesses. It also doesn’t hurt that Warren Buffett’s a brilliant mind and investor.
Griffon isn’t anywhere near Berkshire’s stature but it does have a few moving parts that make it an interesting investment.
“We are focused on acquiring, owning and operating businesses in a variety of industries,” states the company’s website.
“We are long-term investors with substantial experience in the industries which we serve. Our intent is to continue the growth of our existing segments and to diversify further through investments and acquisitions.”
When Griffon’s predecessor company was founded in 1959, its corporate name was Instrument Systems Corporation (ISC), and it produced electronic and electromechanical products for governments and the military.
In 1961, ISC acquired Telephonics Corp., a maker of audio equipment. In September 2021, the company began exploring strategic alternatives for Telephonics. In June 2022, Griffon sold Telephonics to TTM Technologies (TTMI) for $330 million.
The sale of one of its original businesses is part of a transformation that began in 2018, and is still ongoing.
“Over the past four years, we have undertaken a series of transformative transactions. We divested our specialty plastics business in 2018 to focus on our core markets and improve our free cash flow conversion,” stated page 2 of Griffon’s 2021 annual report.
It’s Looking for Strategic Alternatives
It still has some work to do on its transformation.
On Nov. 17, Griffon reported Q4 2022 results. While revenues for fiscal 2022 jumped by 25%, to $2.8 billion, it was forced to take a non-cash charge of $517 million for goodwill and intangible asset impairments in its Consumer and Professional Products operating segment.
As a result, Griffon lost $270.9 million before taxes in 2022 from its continuing operations, dpwn from a profit of $110.0 million in 2021. On an adjusted basis, Griffon earned $219.8 million in 2022, 2.5x its adjusted earnings from continuing operations in 2021.
In May of this year, Griffon launched a review of strategic alternatives to maximize shareholder value -- a sale, merger, divestiture, recapitalization, and anything else that might reward shareholders.
“Notwithstanding the increased guidance for fiscal 2022, and our confidence in our forward outlook, there is a profound disconnect between Griffon's share price and the underlying value of our businesses,” CEO Ronald J. Cramer stated in its May 2022 press release.
Its shares are up more than 46% since its May 16 announcement. The strategic review is ongoing.
In fiscal 2023 (Sept. 30 year-end), it expects revenue of $2.95 billion, 5.5% higher than in fiscal 2022, and adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $500 million.
The Best Option for Griffon
The company has two revenue streams: Consumer and Professional Products and Home and Building Products. The latter generates 53% of Griffon’s revenue and 81% of its adjusted EBITDA.
By hook or by crook, it either has to sell the former in one piece, spin it off, or sell off each of the pieces.
The Consumer and Professional Products segment includes The Ames Companies, a manufacturer of hand-powered landscaping tools, Hunter ceiling fans, and ClosetMaid closets. It acquired Hunter Fan in January for $845 million.
It is this business that recorded the $517 million in non-cash impairment charges. The sooner it finishes the review, the better.
The Home and Building Products Business consists entirely of Clopay Corporation, the largest manufacturer of garage doors in North America. It is an excellent business.
As for the put option, I like the idea of acquiring Griffon shares for $28.60 ($30 strike less $1.40 ask premium) by selling the put contract. Any announcement of a sale would likely boost the shares into the $40s.
It’s an intriguing business to say the least.
More Options News from Barchart
- There’s One Detail About Macy’s (M) Earnings You Shouldn’t Ignore
- Domino's Pizza Stock Looks Like a Bargain During Thanksgiving
- These Stocks Are Currently Showing Low Implied Volatility
- Here Are 64 Reasons to Bet On Wednesday’s Unusual Options Activity
