Company Profile Retail Building Materials by thy59444

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									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

								
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