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Company Profile Retail Building Materials document sample
Document Sample
The Home Depot
By
Mike Sartorius
Presentation Outline
• Past Position • Stock Valuations
• Company Profile • EVA & MVA Model
• Pertinent News • Summary of Valuations
• Financial Statements • Analysts
• Industry Comparison Recommendation
• Stock Comparison: 1 and • Why is this stock for
3 year
SMIP
• Trend Analysis
• Recommendation
• Common Size Analysis
Snapshot
• Market Cap: $85,666 million
• What Industry: Retail (Home Improvement)
• What Sector: Services
• Recent Stock Price: $39.25
• 52 Week High: $39.95
• 52 Week Low: $31.93
• Beta: .94
• Ticker Symbol: HD
Past Position
• Number of Shares: 75
• Date Purchased: November 1999
• Date Sold: March 2003
• Buy Price: $54.03
• Sell Price: $22.59
• Approximate Loss: $(2357.94)
Graph of Past Position
Profile
• The Home Depot was founded in 1978 in Atlanta, Georgia
and has since become the world's largest home improvement
retailer, operating more than 1,700 stores (Home Depot,
EXPO, and other subsidiary companies) in the United States,
Mexico, and Canada.
• Home Depot stores stock approximately 40,000 to 50,000
different kinds of building materials, home improvement
supplies, décor and lawn and garden products that are sold to
do-it-yourselfers, home improvement contractors, trades
people, and building maintenance professionals.
Profile Continued
• Expo Design Center stores sell products and services
primarily for home decorating and remodeling projects.
• Other subsidiary companies under the Home Depot parent
company, primarily distribute products and sell installation
services to businesses and governments.
• Home Depot’s biggest competitors are Lowes, Sears, and
other small hardware stores.
Pertinent News
• September 21, 2004 - Home Depot Recruiting Military Spouses
– Home Depot, which averages a new store opening every 48 hours,
said its effort with the Defense Department also will involve hiring
more veterans, active duty service members about to be
discharged, National Guard members and reservists.
• October 12, 2004 - Home Improvement Industry Pursues Hispanic
Market
– The U.S. home improvement industry is looking to build business
with U.S. Hispanics in hopes of cashing in on a market that could
be as big as $30 billion.
– Note: Home Depot estimates a $900 billion global home
improvement market opportunity.
Pertinent News
• October 10, 2004 - Shares of Home Depot Look Undervalued
– Home Depot accounts for 18 percent of this market, more than
twice the amount of Lowe's, which has about 1,000 stores.
Analysts polled by Reuters expect Home Depot to post per-share
profit of $2.21 in fiscal 2005, which ends in January, and $2.53 in
fiscal 2006.
– Home Depot rolled out its first store in Manhattan last month.
Chief Executive Robert Nardelli is emphasizing strategic
expansion, with hopes to open more than 200 stores per year. He is
also emphasizing new higher-end products, improved customer
service and more reliance on information technology.
Pertinent News
• September 22, 2004 - Home Depot, Lowe's see strong post-
hurricane demand
– "We're 10 weeks after Charley and are still seeing a tremendous
amount of rebuilding activity in Southwest Florida, which leads us
to believe that we will have a rebuilding phase going on for quite a
while throughout the state.”
Financial Statements
• Please Refer to Handout
Industry Comparison
Valuation Ratios HD Lowes Sears Industry Sector S&P 500
P/E Ratio (TTM) 18.52 19.39 22.3 19.39 27.67 22.57
Beta 0.94 1.14 0.56 1.31 0.99 1
Price to Sales (TTM) 1.27 1.29 0.25 1.26 2.82 3.19
Price to Book (MRQ) 3.81 3.97 1.45 3.89 3.66 4.04
Price to Free Cash Flow (TTM) 24.33 135.16 NM 23.71 29.64 25.72
% Owned Institutions 62.02 79.61 77.82 64.54 52.11 65.2
Dividends HD Lowes Sears Industry Sector S&P 500
Dividend Yield 0.87 0.73 1.06 0.73 2.18 2.08
Dividend Yield - 5 Year Avg. 0.5 0.2 2.7 0.47 1.45 1.53
Dividend 5 Year Growth Rate 27.65 12.89 0 22.07 1.65 7.38
Payout Ratio (TTM) 14.2 5.07 7.82 11.72 15.36 27.38
Growth Rates(%) HD Lowes Sears Industry Sector S&P 500
Sales - 5 Yr. Growth Rate 16.49 18.26 0.58 16.37 17.81 9.46
EPS (TTM) vs TTM 1 Yr. Ago 27.16 NA 134.99 26.65 14.92 30.32
EPS - 5 Yr. Growth Rate 21.64 28.19 34.09 23.04 14.78 12.44
Capital Spending - 5 Yr. Growth Rate 11.31 17.79 -5.26 12.69 8.44 4.4
Financial Strength HD Lowes Sears Industry Sector S&P 500
Quick Ratio (MRQ) 0.4 0.37 0.4 0.37 0.9 1.31
Current Ratio (MRQ) 1.2 1.37 1.42 1.27 1.44 1.8
Total Debt to Equity (MRQ) 0.07 0.35 0.98 0.17 0.85 0.81
Industry Comparison
Continued
Profitability Ratios (%) HD Lowes Sears Industry Sector S&P 500
Gross Margin (TTM) 32.61 33.07 25.31 33.07 43.54 47.91
Gross Margin - 5 Yr. Avg. 30.52 29.25 36.13 30.72 42.63 46.51
EBITD Margin (TTM) 12.63 12.54 5.07 12.53 22.38 21.57
EBITD - 5 Yr. Avg. 11.2 10.94 9.58 11.08 21.43 20.49
Operating Margin (TTM) 10.88 9.59 1.07 10.37 13.56 21.54
Operating Margin - 5 Yr. Avg. 9.77 7.92 4.46 9.05 11.55 18.07
Pre-Tax Margin (TTM) 10.88 9.59 12.17 10.38 10.83 17.27
Pre-Tax Margin - 5 Yr. Avg. 9.8 7.91 6.75 9.06 11.86 17.1
Net Profit Margin (TTM) 6.85 5.92 7.7 6.56 8.34 13.91
Net Profit Margin - 5 Yr. Avg. 6.06 4.96 4.26 5.62 7.86 11.32
Management Effectiveness (%) HD Lowes Sears Industry Sector S&P 500
Return On Assets (TTM) 13.12 12.12 7.65 12.12 6.17 7.1
Return On Assets - 5 Yr. Avg. 13.54 8.95 4.37 11.72 5.38 6.6
Return On Investment (TTM) 19.09 13.88 16.12 17.26 8.53 10.9
Return On Investment - 5 Yr. Avg. 17.73 11.79 7.22 15.43 7.52 10.69
Return On Equity (TTM) 21.27 19.84 49.64 21.21 12.88 19.54
Return On Equity - 5 Yr. Avg. 19.81 17.64 25.99 18.96 12.86 19
Efficiency HD Lowes Sears Industry Sector S&P 500
Receivable Turnover (TTM) 49.8 224.23 4.83 46.86 16.79 9.83
Inventory Turnover (TTM) 5 4.54 4.66 4.84 18.36 12.26
Asset Turnover (TTM) 1.92 1.77 1.12 1.86 1.09 0.92
Stock Comparison:
1 year
Stock Comparison:
3 years
Trend Analysis
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Trend Analysis
Continued
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Common Size Analysis
Net Sales January-04 January-03 January-02
CGS 68.25 68.91 69.85
S/G/A 21.19 21.08 20.94
Oper. Inc 10.56 10.01 9.21
Interest Exp. 0.1 0.06 0.05
Income Tax Expense 3.92 3.79 3.57
Income Before XO items 6.64 6.29 5.68
EBIT 10.56 10.01 9.21
Reinvested Earnings 5.72 5.45 4.94
% of Total Liabilities & Equity
Accts. Payable 14.98 15.19 13.02
ST Borrowing 1.48 0.02 0
Other ST Borrowing 11.28 11.56 11.61
Current Liabilities 27.74 26.77 24.63
LT Borrowings 2.49 4.4 4.74
Other LT Borrowings 4.7 2.84 2.13
Total Liabilities 34.93 34.02 31.49
Total Common Equity 65.07 65.98 68.51
Shareholder Equity 65.07 65.98 68.51
% of Total Assets
Cash and Near Cash 8.21 7.29 9.38
Marketable Securities 0.08 0.22 0.26
Acct. & Notes Rec. 3.19 3.57 3.49
Inventory 26.36 27.78 25.48
Other Current Assets 0.88 0.85 0.64
Total Current Assets 38.7 39.71 39.26
Net Fixed Assets 58.26 57.21 58.25
Free Cash Flow Inputs
(18%)
Name of Company Home Depot, Inc.
Estimate Weighted Average Cost of Capital
Insert Initial Free Cash Flow (Computer) $1,984.87 10.640% Cost of Equity Capital
Insert Initial Growth Rate 18.00% 4.590% Before Tax Cost of Debt
Insert Terminal Growth Rate 5.00% 6.000% Market Risk Premium (RM-RF)
Insert Weighted Average Cost of Capital 10.33%
How Many Years is Growth Projected 10
3.964% Debt Ratio (Total Debt/Total Assets)
Number of Shares of Common Stock 2,289.00 0.940 Beta
Tax Rate 37.06% 5.000% Risk-free Rate (Use L-T Treasury Rate)
Total Debt Outstanding $2,018.00 10.333% = Weighted Average Cost of Capital
Estimate Free Cash Flow
Current Sales ($) $64,816.00
EBIT Margin (%) 10.56%
EBIT $6,846.00
Plus - Depreciation $1,076.00
Less - Capital Expenditures $3,508.00
Less - Net Change in Working Capital ($108.00)
Equals Operating Cash Flow $4,522.00
Less Taxes $2,537.13
Equals Free Cash Flow $1,984.87
Free Cash
Flow Model (18%)
Year 0 1 2 3 4
Free Cash
$0 $2,342 $2,764 $3,261 $3,848
Flow
Terminal
Value
Total FCF $0 $2,342 $2,764 $3,261 $3,848
Discounted
$0 $2,123 $2,270 $2,428 $2,597
FCF
5 6 7 8 9 10
Net Present $105,774
$4,541 $5,358 $6,323 $7,461 $8,804 $10,388 Value of FCF
$204,545 Net Present
Value of FCF $103,756
$4,541 $5,358 $6,323 $7,461 $8,804 $214,934 Minus Debt
Per Share
$2,777 $2,970 $3,177 $3,397 $3,634 $80,401 Value
$45.33
Free Cash Flow Inputs
(12%)
Name of Company Home Depot, Inc.
Estimate Weighted Average Cost of Capital
Insert Initial Free Cash Flow (Computer) $1,984.87 10.640% Cost of Equity Capital
Insert Initial Growth Rate 12.00% 4.590% Before Tax Cost of Debt
Insert Terminal Growth Rate 5.00%
6.000% Market Risk Premium (RM-RF)
Insert Weighted Average Cost of Capital 10.33%
3.964% Debt Ratio (Total Debt/Total Assets)
How Many Years is Growth Projected 10
Number of Shares of Common Stock 2,289.00 0.940 Beta
Tax Rate 37.06% 5.000% Risk-free Rate (Use L-T Treasury Rate)
Total Debt Outstanding $2,018.00 10.333% = Weighted Average Cost of Capital
Estimate Free Cash Flow
Current Sales ($) $64,816.00
EBIT Margin (%) 10.56%
EBIT $6,846.00
Plus - Depreciation $1,076.00
Less - Capital Expenditures $3,508.00
Less - Net Change in Working Capital ($108.00)
Equals Operating Cash Flow $4,522.00
Less Taxes $2,537.13
Equals Free Cash Flow $1,984.87
Free Cash
Flow Model (12%)
Year 0 1 2 3 4
Free Cash Flow $0 $2,223 $2,490 $2,789 $3,123
Terminal Value
Total FCF $0 $2,223 $2,490 $2,789 $3,123
$0 $2,015 $2,045 $2,076 $2,108
Discounted FCF
5 6 7 8 9 10
$3,498 $3,918 $4,388 $4,914 $5,504 $6,165
Net Present
$121,381 $66,980
Value of FCF
$3,498 $3,918 $4,388 $4,914 $5,504 $127,545 Net Present
Value of FCF $64,962
$2,139 $2,172 $2,205 $2,238 $2,272 $47,711 Minus Debt
$28.38
Per Share Value
EVA & MVA Inputs
CALCULATION OF EVA AND MVA
Name of Company Home Depot Year 2004
Short-Term Debt $0.00
Preferred Preferred
Dividend $ Stock Price
Long-Term Debt $1,509.00 per share per share
Preferred Stock $0.00 $0.00 $0.00
Common Stock $119.00
Paid-In Capital $6,184.00
Retained Earnings $19,680.00
Total Invested Capital $27,492.00
Price of Stock $39.27
Number of Shares Outstanding 2,289.00
EBIT $6,846.00
Tax Rate 37.10%
Less: Taxes $2,539.87
Equals NOPAT $4,306.13
Rate on Short-Term Debt 2.43%
Rate on Long-Term Debt 4.59%
Market Risk Premium 6.00%
Risk-Free Rate (L/T Treasury bond) 4.50%
Debt to Equity Ratio 0.06
Beta of Stock 0.94
Cost of Preferred Stock 0.00%
Cost of Equity Capital 10.140% % S-T Debt % L-T Debt % Equity % Preferred Stock
WACC 9.84% 0.00% 5.49% 94.51% 0.00%
EVA & MVA Model
CALCULATION OF EVA - ECONOMIC VALUE ADDED
Equals:
NOPAT (Net EVA
Operating Equals: (NOPAT -
Profit After Invested Capital Capital
EBIT Less: Taxes Tax) Capital WACC Charge Charge)
$6,846.00 $2,539.87 $4,306.13 $27,492.00 9.84% $2,703.94 $1,602.19
Firm is Creating Shareholder Wealth
CALCULATION OF MVA - MARKET VALUE ADDED
Market Equals: Minus: Total
Value of Plus: Market Market Value Invested Equals:
Equity Value of Debt of Firm Capital MVA
$89,889.03 $1,509.00 $91,398.03 $27,492.00 $63,906.03
Firm is Creating Shareholder Wealth
Alternative Valuation
Inputs
1994 1995 1996 1997 1998 1999 2000
Net Earnings $ 457 $ 605 $ 732 $ 938 $ 1,160 $ 1,614 $ 2,320
Dividends
Paid $ 50 $ 68 $ 90 $ 110 $ 139 $ 168 $ 255
Shareholder
Equity $ 2,814 $ 3,442 $ 4,988 $ 5,955 $ 7,098 $ 8,740 $ 12,341
Shares
Outstanding 2039.00 2142.00 2151.00 2196.00 2286.00 2321.00 2342.00
2001 2002 2003 2004 10 year 5 year
Net Earnings $ 2,581 $ 3,044 $ 3,664 $ 4,304 25.14% 21.67%
Dividends
Paid $ 371 $ 396 $ 492 $ 595
Growth Rates
28.10% 28.78%
Shareholder
Equity $ 15,004 $ 18,082 $ 19,802 $ 22,407 23.06% 20.72%
Shares
Outstanding 2352.00 $ 2,353 $ 2,344 $ 2,287
Alternative Valuation
1994 1995
Ratios 1996 1997 1998 1999 2000
Return on
Equity 16.24% 17.58% 14.68% 15.75% 16.34% 18.47% 18.80%
EPS $0.22 $0.28 $0.34 $0.43 $0.51 $0.70 $0.99
Shareholder
Equity per
share $ 1.38 $ 1.61 $ 2.32 $ 2.71 $ 3.10 $ 3.77 $ 5.27
Dividends Per
Share $ 0.02 $ 0.03 $ 0.04 $ 0.05 $ 0.06 $ 0.07 $ 0.11
% of
dividends 10.94% 11.24% 12.30% 11.73% 11.98% 10.41% 10.99%
Book Value
Per Share $ 1.38 $ 1.61 $ 2.32 $ 2.71 $ 3.10 $ 3.77 $ 5.27
2001 2002 2003 2004 10 year 5 year 11 year
Return on
Equity 17.20% 16.83% 18.50% 19.21% 18.11% 17.24%
EPS $1.10 $1.29 $1.56 $1.88 23.93% 21.85%
Shareholder
Equity per
share $ 6.38 $ 7.68 $ 8.45 $ 9.80
Dividends Per
Share $ 0.16 $ 0.17 $ 0.21 $ 0.26
% of
dividends 14.37% 13.01% 13.43% 13.82% 13.13% 12.20%
Book Value
Per Share $ 6.38 $ 7.68 $ 8.45 $ 9.80
Alternative Valuation
Model
Shareholder
Equity Per Earnings Per Dividends per
Share Share share RE/S
2003 $ 9.80 $ 1.88 $ 0.25 $ 1.63
2004 $ 11.43 $ 1.97 $ 0.26 $ 1.71
2005 $ 13.14 $ 2.27 $ 0.30 $ 1.97
2006 $ 15.11 $ 2.60 $ 0.34 $ 2.26
2007 $ 17.38 $ 2.99 $ 0.39 $ 2.60
2008 $ 19.98 $ 3.44 $ 0.45 $ 2.99
2009 $ 22.97 $ 3.96 $ 0.52 $ 3.44
2010 $ 26.41 $ 4.55 $ 0.60 $ 3.95
2011 $ 30.36 $ 5.23 $ 0.69 $ 4.55
2012 $ 34.91 $ 6.02 $ 0.79 $ 5.23
2013 $ 40.14 $ 6.92 $ 0.91 $ 6.01
2014 $ 46.15 $ 7.95 $ 1.04 $ 6.91
P/E Ratio Estimated Price in 10 years Rate of Return*
5 - Year Low 13.36 $ 106.27 10.00%
5 - Year High 80.13 $ 637.35 31.00%
5 - Year Avg. 46.745 $ 371.81 24.30%
*If bought at the current market price.
To earn an average of 25% return on Home Depot in 10 years SMIP wants to buy
the stock at around $37.75.
Long Term US Treasury Bond
Present Value Per Share Earnings $ 1.88
30 Year Long Term Treasury Bond 5.38%
$ 35.01
Basic Valuations Inputs
STOCK VALUATION MODELS
NAME OF COMPANY Home Depot, Inc.
LAST YEAR 2003 Year
NUMBER OF SHARES OUTSTANDING (Mil.) 2,289.00 Millions of Shares
MARKET PRICE OF STOCK / SHARE $39.25 Dollars Per Share $0.00 Price of Stock
All Data
NET INCOME AFTER TAXES $4,304.00 Millions of Dollars Expected in
Required
TOTAL SALES OR REVENUES $64,816.00 Millions of Dollars 5 years
BOOK VALUE OF EQUITY (FROM BALANCE SHEET) $22,407.00 Millions of Dollars
RISK FREE RATE (L/T T-Bond) 4.50% Annual Percentage Rate
DIVIDENDS PAID (TOTAL AMOUNT PAID) $595.00 Millions of Dollars
STOCK REPURCHASES (TOTAL AMOUNT PAID) $1,554.00 Millions of Dollars
REQUIRED INFORMATION FOR CALCULATION OF REQUIRED RATE OF RETURN
BETA OF STOCK Required 0.94
MARKET RISK PREMIUM (5%-6% Historically) Data 6.00% Expected Market Risk Premium %
REQUIRED INFORMATION FOR VARIABLE GROWTH RATE VALUATIONS
EXPECTED GROWTH RATE (EARNINGS OR Must be positive values
in each cell
DIVIDENDS & STOCK REPURCHASES) 12.0000% 12.0000% 12.0000% 12.0000% 5.0000%
Basic Valuation
Models
COMPUTER-GENERATED CALCULATIONS
EARNINGS PER SHARE $1.88
LAST CASH DIVIDEND & STOCK REPURCHASE
$0.94
PAYMENT PER SHARE
EXPECTED ANNUAL GROWTH RATE (EARNINGS
10.07%
OR DIVIDENDS & STOCK REPURCHASES)
EXPECTED EARNINGS PER SHARE IN 5 YEARS $2.00
SUSTAINABLE RATE OF GROWTH 9.62%
REQUIRED RATE OF RETURN (k) 10.14% CAPM
REQUIRED RATE OF RETURN (k) 12.71% Dividend Discount Model
REQUIRED RATE OF RETURN (k) 11.42% Average of CAPM and DDM
COMPUTER-GENERATED CALCULATIONS
STOCK VALUE - ZERO GROWTH MODEL $8.22
STOCK VALUE - CONSTANT GROWTH MODEL $76.54
STOCK VALUE - VARIABLE GROWTH MODEL $19.47
STOCK VALUE - DIVIDEND & EARNINGS MODEL $4.53
STOCK VALUE - PRICE / EARNINGS MODEL $112.36
Summary of Valuations
•Basic Stock Valuations: $76.54 or $19.47
•EVA & MVA: Creating Shareholder Value
• Free Cash Flow (18%): $45.33
• Free Cash Flow (12%): $28.38
• Value Pro: $44.5
•Alternative Valuation: Buy Below $37.5
Analysts
Recommendations
Consensus Company Fiscal Year Last
Recommendation End Month Updated
OUTPERFORM January 19-Oct-04
Analyst Recommendations and Revisions
1-5 Linear Scale Current 1 Month Ago 2 Months Ago 1 Year Ago
(1)BUY 8 9 10 11
(2)OUTPERFORM 6 6 6 5
(3)HOLD 11 10 11 11
(4)UNDERPERFORM 1 1 0 0
(5)SELL 0 0 0 0
No Opinion 2 3 3 2
Mean Rating 2.19 2.12 2.04 2
Risk
• Risk vs. Volatility
Risk to HD
• Higher interest rates reduce home
improvement projects
• Suppliers raise prices - increased costs
• Over-expansion -growth is too rapid
• Growth into emerging markets doesn’t work
• Relatively low profit margin - any
economic slowdown could hurt earnings
(unlikely)
Why Home Depot
for SMIP
• Leader in the Industry
– Twice the size of Lowes
– Almost all ratios are better than Lowes
• High ROE and ROA
• Growth stock selling at a discount
– HD plans to open 200 new stores per year
– Moving into both Mexico and Canada (Lowes isn’t
expected to move internationally for three years)
– Price to Earnings near all-time low
Why HD For
SMIP Continued
• Management appears to be rational
– Low dividends due to ability to reinvest shareholders
money at higher rates than shareholders can achieve
• Consistent Operating History
– Superior Growth rates
• Favorable long-term perspective
– Growing investments into homes
• We understand how the company works
Recommendation
• Shares to Buy: 200
• Buy Price: $37.5
• Set 15% floor: $31.88
• Set Ceiling: P/E ratio of 60 or above
• Don’t buy until price drops below target buy
price after election
