While most analysts are buzzing about Griffon Corporation's robust Home and Building Products (HBP) performance this quarter, there's a silent storm brewing in their Consumer and Professional Products (CPP) segment that deserves far more attention. Hidden within the unassuming language of the Q2 2024 earnings call lies a tantalizing clue: the strategic brilliance of AMES' global sourcing expansion is playing out even faster than expected.

On the surface, CPP's 11% revenue decline appears concerning. Reduced customer demand and elevated inventory levels seem to paint a gloomy picture. But delve deeper, and a glimmer of strategic genius emerges. CPP's EBITDA improved by 2%, reaching $20 million, and the EBITDA margin expanded year-over-year. This is no accident. It's a direct consequence of the bold decision to expand AMES' global sourcing strategy, a move initiated in May 2023 and slated for completion by the end of calendar year 2024.

What's so remarkable is that these margin improvements are appearing while CPP is still largely selling inventory manufactured at the higher-cost US facilities. This means the full impact of the global sourcing shift hasn't even hit the P&L yet. Imagine the margin tsunami that's waiting to be unleashed once AMES transitions to primarily selling goods sourced through its optimized global network.

Here's where things get truly interesting: Griffon's management, in prior earnings calls, projected a modest EBITDA improvement for CPP in 2024, with the significant margin leap expected in 2025. However, this quarter's results suggest those timelines might be overly cautious. We're already seeing margin expansion, even before the bulk of global sourcing takes effect. This implies that CPP's 2024 performance could surpass expectations, and the 2025 leap could be far more dramatic than initially anticipated.

Consider this: if CPP maintains its current EBITDA margin improvement trajectory through the remainder of 2024, it's not unreasonable to hypothesize a year-over-year EBITDA growth of 5% to 10%. This is a significant upgrade from the 'modest improvement' previously communicated.

Looking ahead to 2025, the potential is even more thrilling. Assuming CPP fully transitions to global sourcing by then, and factoring in the ongoing normalization of inventory levels, a 10% to 15% EBITDA margin for the segment is entirely within reach. This would represent a monumental shift in profitability for AMES.

Adding further fuel to this silent storm is Griffon's robust share buyback program. The company repurchased 1.8 million shares for $117 million this quarter alone. Since April 2023, Griffon has reduced its outstanding shares by an impressive 13.3%. This focused share reduction, coupled with the impending AMES profitability surge, sets the stage for a potentially explosive rise in Griffon's earnings per share in the coming years.

Projected EBITDA Growth for Griffon CPP

The following chart illustrates a potential growth trajectory for CPP's EBITDA based on current trends and the anticipated impact of global sourcing. Note that this is a hypothetical projection and actual results may vary.

The true power of AMES' global sourcing strategy is just beginning to reveal itself. While the market fixates on the obvious strength of HBP, the silent storm brewing in CPP is poised to become the defining narrative for Griffon's future. The question isn't if AMES will achieve its 15% EBITDA margin goal, but rather how quickly it will surpass it. And for investors who see the potential brewing beneath the surface, the rewards could be truly extraordinary.

"Griffon's CPP segment is showing strong EBITDA margin improvement despite still selling higher-cost US-manufactured inventory. The global sourcing strategy, set for completion in 2024, is expected to unlock substantial additional margin expansion. Early margin improvements suggest that CPP could outperform 2024 projections, and the 2025 profit leap could be larger than initially anticipated. Griffon's share buyback program is further enhancing potential earnings per share growth."

"Fun Fact: Griffon Corporation's history stretches back to 1774, making it older than the United States itself! It began as a textile manufacturer and has evolved through acquisitions and strategic shifts to become the diversified powerhouse it is today."