Griffon Corporation (NYSE:GFF) shares moved up marginally after Barington Capital disclosed a 5% stake in the company and expressed its concern that the current stock price does not reflect the intrinsic value of the company's operating divisions. In particular, the hedge fund believes that the market has been undervaluing the company's telephonics subsidiary as well as what they view as the company's core businesses - garage doors and specialty plastic films. Barington made several recommendations aimed at helping the company move above its three year $18.50 to $28.50 range, which has led to significant investor concern recently.

Barington made five key recommendations aimed at unlocking value for shareholders in the company's struggling operating segments:

1. Unlock the value of the company's Telephonics subsidiary, which is trading at a significant discount to its peers. Based upon Barington's analysis of publicly traded defense electronics companies as well as recent M&A activity in the industry, the Telephonics subsidiary should be valued at 9-12 times EBITDA or approximately $400 million to $550 million. Unfortunately, the market current values the entire company at only 7 times EBITDA! While the company said it recognizes this discount, the hedge fund recommends that the company consider an IPO, tax-free spin-off, or an outright sale of the subsidiary so shareholders can fully realize its value.
2. Increase share repurchases by incurring additional debt. With a net debt/trailing EBITDA of only 1.4x, the hedge fund believes that the company is under leveraged. If the company increased its leverage to Barington's recommended 2.5x net debt/trailing EBITDA level, it would be able to raise approximately $110 million. Combined with its current $20 million in excess cash, the company would be able to repurchase approximately 15-20% of the company's outstanding shares. The hedge fund believes that if the buyback takes place at a premium to the going prices, it would be accretive to the company's earnings per share.
3. Pursue cost reduction initiatives to improve margins. Barington said that while it applauds the reduction of the Plastic subsidiary's workforce in 2006 that is expected to result in approximately $5 million in annual cost savings, they believe that further reductions in the company's cost structure are necessary. Given that the Garage Doors subsidiary has recently experienced pressures on revenues and earnings, they believe that the company should particularly focus on this business.
4. Divest installation services to focus on higher margin divisions. Barington notes that while most of the company's operating divisions are high market share, high margin businesses, the company's Installation Services division is an exception. Moreover, the hedge fund noted that the performance of this business is tied to the volatility of the housing market, which is obviously experiencing volatility these days. Consequently, Barington recommends that the company divest this segment to solidify earnings.
5. Improve corporate governance by declassifying the company's board of directors and separating the chairman and CEO positions. These are critical issues that need to be addressed in order to ensure that shareholders remain in control of the company.

Barington has a long track record of successfully working with the management teams and board of directors of publicly traded companies to develop plans to create or improve shareholder value. If they are able to get these five changes implemented, it could mean significant upside for GFF shares. Meanwhile, we know that the Clinton Group has expressed similar thoughts in the past when they said the company's shares could be worth between $31 to $35 per share. Combined, these factors make GFF a stock worth following!

Related Companies
Drew Industries, Inc. (DW)
International Aluminum Corporation (IAL)
Cubic Corporation (CUB)