Griffon Corp rating upgraded due to strong earnings and improved ratios - S&P Global

Investing.com -- S&P Global has upgraded its issuer credit rating on Griffon Corp (NYSE:GFF) from 'B+' to 'BB-' due to the company's continued strong earnings and improved ratios. The outlook for the diversified management and holding company remains stable. S&P Global believes that Griffon Corp can sustain these results and maintain adjusted leverage below 4x in most market conditions.

In addition to the issuer credit rating, S&P Global also raised its issue-level ratings on Griffon Corp's senior secured debt to 'BB+' from 'BB' and on its senior unsecured debt to 'B+' from 'B'. These upgrades reflect Griffon Corp's improved credit measures in fiscal 2025, despite less favorable business conditions expected over the next 12-24 months.

Griffon Corp's improved profitability is expected to help the company sustain adjusted leverage well under 4x throughout the business cycle. The company's strategic initiatives, including divestitures and accretive acquisitions, have improved underlying operations. This is now reflected in the company's overall improved financial performance, which includes higher margins and earnings growth. For example, Griffon Corp's most recent adjusted EBITDA margins are in the 19%-21% range, up from the five-year average of about 16%. Earnings in 2024 were about 2x those in 2020, increasing to $555 million from about $270 million.

Despite a mixed outlook for end-market demand drivers, Griffon Corp's revenues and earnings are expected to continue to increase over the next 12-24 months. While residential construction may remain slow due to higher interest rates and continued weakness in commercial end markets, repair and remodeling, particularly within the garage door segment, is expected to continue to drive demand.

Griffon Corp's revenue is expected to be between $2.65 billion-$2.75 billion, and adjusted earnings are expected to be between $550 million-$600 million over fiscal years 2025-2026. As a result, Griffon’s adjusted EBITDA margins could be 20%-22% over this period.

However, the ongoing uncertainty around U.S. tariff policy could pose some downside risks to these forecasts. Higher input costs could affect profitability if Griffon Corp cannot effectively pass through costs or if the lag is longer than expected. Certain products under the company’s tools and fans sub-product category have supply chain exposures to China.

S&P Global expects Griffon Corp's financial policy actions to be in line with improved thresholds. The company is not expected to reduce debt significantly over the next 12-24 months. However, large acquisitions could temporarily raise adjusted leverage to the 4x-5x range. Griffon Corp is expected to maintain adjusted leverage under 4x through most normal business conditions and continue to remain opportunistic towards growth and shareholder returns. The company is expected to use most of its $350 million-$375 million in annual operating cash flow in fiscal years 2025-2026 for bolt-on acquisitions and/or shareholder returns via repurchases.

The stable outlook on Griffon Corp reflects S&P Global's expectations of the company maintaining adjusted leverage below 4x, while sustaining operating cash flow to debt of 15%-20%. The company could achieve these metrics even amid less favorable business conditions.

S&P Global could lower its ratings on Griffon Corp over the next 12 months if adjusted earnings are more than 25% lower than base-case expectations, or if the company undertakes an aggressive financial policy. On the other hand, ratings could be raised if the company materially improves scale and business diversity while maintaining adjusted leverage under 3x and commits to maintaining such credit measures.

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