Griffon Corporation (GFF) Underperformance Amid a Rising Market: Valuation Divergence and Sector-Specific Risks

Griffon Corporation (GFF) has underperformed in a broadly rising market in 2025, despite its exposure to the aerospace and defense sector-a space that has seen valuation multiples expand significantly. This divergence warrants closer scrutiny, as it reflects both structural challenges within GFF's business segments and broader sector-specific risks.

Valuation Divergence: A Tale of Two Multiples

Griffon's trailing price-to-earnings (P/E) ratio of 16.72 as of August 2025 lags behind the aerospace and defense industry average of 18.42, with peers like Lockheed Martin (23.57) and Northrop Grumman (21.58) trading at even higher multiples. This gap suggests that investors are pricing in lower growth expectations for GFF compared to its peers. Meanwhile, GFF's price-to-book (P/B) ratio of 53.75 stands out as an anomaly, far exceeding industry norms. This premium on book value may reflect optimism about its Home and Building Products (HBP) segment, which contributes 37.7% of total revenue, but it also raises questions about whether the market is overpaying for intangible assets or underappreciating liabilities.

The enterprise value to EBITDA (EV/EBITDA) ratio of 9.59 further underscores GFF's undervaluation relative to the sector. While the aerospace and defense industry's EBITDA multiples averaged 12x in Q1 2025, GFF's ratio remains below the capital-intensive sector's typical range. This discrepancy hints at a disconnect between GFF's fundamentals and market perception.

Segment-Specific Challenges: Margin Pressures and Revenue Drag

Griffon's business structure reveals stark contrasts in performance. The HBP segment, which generates $1.59 billion in annual revenue, has shown resilience, with adjusted EBITDA rising 9% year-over-year in Q3 2025. Management attributes this to favorable pricing and automation-driven efficiency. However, the Consumer and Professional Products (CPP) segment, accounting for 24.6% of revenue, has been a drag. Q3 2025 saw CPP revenue plummet 16% to $213 million, driven by weak U.S. consumer demand and disrupted ordering patterns. Even as the company trimmed costs to improve EBITDA margins by 270 basis points, the segment's struggles forced GFF to revise its full-year revenue guidance downward by $100 million.

The Defense & Aerospace segment, which contributed 32% of 2023 revenue, adds another layer of complexity. While this segment benefits from government contracts-accounting for 45% of total revenue-it is vulnerable to shifts in defense budgets and procurement policies. For instance, a 5% year-over-year decline in Q3 2025 revenue could signal near-term volatility, particularly as geopolitical tensions and fiscal constraints reshape spending priorities.

Sector-Specific Risks: Leverage, Liquidity, and Contract Dependency

The aerospace and defense industry's financial health appears robust, with a leverage ratio of 1.38 and a debt-to-equity ratio of 0.83 in Q3 2025. However, GFF's liquidity position is weaker, as evidenced by its CPP segment's asset-light model and reliance on global sourcing. This exposes the company to supply chain disruptions and currency fluctuations, compounding margin pressures.

Moreover, the sector's recent valuation surge-TEV/EBITDA multiples expanded to 16.4x in Q2 2025-has been fueled by competition for IP-rich assets. GFF, however, lacks the R&D-driven growth profile of peers like Lockheed Martin, which may explain its lower multiple. The company's capital allocation strategy, including $145 million in shareholder returns in H1 2025, is commendable but may not offset structural weaknesses in its CPP and Defense segments.

Conclusion: A Cautious Outlook

Griffon's undervaluation relative to its sector is evident, but the company's underperformance reflects a combination of segment-specific challenges and sector-wide risks. While HBP's efficiency gains and asset-light model offer some optimism, the CPP segment's exposure to tariffs and consumer demand volatility remains a drag. Meanwhile, the Defense segment's reliance on government contracts introduces uncertainty in an era of shifting fiscal priorities. Investors may find GFF appealing at its current valuation, but the path to outperformance will require navigating complex operational and macroeconomic headwinds.