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Presented by:Presented by:
Clarisa EstradaClarisa Estrada
Agnes KingAgnes King
Bach TranBach Tran
Wan Bon WooWan Bon Woo
What is Home Depot?What is Home Depot? The Home Depot is the world’s largest
home improvement retailer and second largest retailer in the United States.
It has been recognized by Fortune as the #1 most Admired Specialty Retailer for 2005.
It is the fastest growing retailer in history; the first to reach $30 Billions, then $40 Billions and now $50 Billions in sales!
Home Depot HistoryHome Depot History In 1978 Bernie Marcus and
Arthur Blank from Atlanta, Georgia developed the concept and corporation of a company named “MB associates.”
The Home Depot story all began with a vision of warehouse stores filled from floor to ceiling with a wide assortment of products at the lowest prices with trained associates giving absolutely the best customer service in the industry.
Composition of the BoardComposition of the Board ROBERT L. NARDELLI, age
56, has been President and Chief Executive Officer since December 2000 and Chairman since January 1, 2002.
Prior thereto, Mr. Nardelli served as President and Chief Executive Officer of GE Power Systems, a division of General Electric Company, since 1995.
5% Insider Ownership5% Insider Ownership
Ownership Information
Shares Outstanding 2.16 Bil
Institutional Ownership (%) 63.60
Top 10 Institutions (%) 25.31
Mutual Fund Ownership (%) 24.82
5%/Insider Ownership (%) 1.87
Float (%) 98.13
Product DescriptionsProduct Descriptions
Percentage of Revenue for Percentage of Revenue for Fiscal YearFiscal Year
24.40%
29%
26.90%
19.70%
Building Materials,Lumber, andmillworkPaint, Flooring, andWall Covering
Hardware andSeasonal
Plumbing,Electrical, andKitchen
Product Group category Total Sales (in millions) %
Paint, Flooring, and Wall Covering 21,197.26 29%
Hardware and Seasonal 19,662.29 26.9%
Building Materials, Lumber and millwork
17,834.94 24.4%
Plumbing, Electrical, and Kitchen 14,399.52 19.7%
Major CompetitorsMajor Competitors
With fiscal year 2004 sales of $36.5 billion, Lowe's Companies, Inc. is a FORTUNE® 500 company that serves approximately 11 million customers a week at more than 1,100 home improvement stores in 48 states.
Sherwin-Williams has been in business since 1866. The Company's core business is the manufacture, distribution and sale of coatings and related products. Sherwin-Williams® sell labeled architectural coatings, industrial finishes and associated supplies through company-operated paint and wall covering stores in 50 states, Canada and some countries of Latin America.
Market Capitalization
Lowe’s Companies, Inc
33%
Griffin Land and Nurseries Inc0%
Home Depot, Inc63%
Building Materials Holding Corp
1%
Fastenal Co.3%
Home Depot, Inc
Lowe’s Companies, Inc
Fastenal Co.
Building Materials Holding Corp
Griffin Land and Nurseries Inc
CompanyMarket Cap (in
Millions)Percent of Capitalization
Home Depot, Inc $86,220 63%
Lowe’s Companies, Inc $44,420 33%
Fastenal Co. $4,430 3%
Building Materials Holding Corp
$890.15 1%
Griffin Land and Nurseries Inc
$122.83 0%
Industry ChartIndustry ChartSales (in millions)
Tractor Supply Company
2%
Payless Cashways, Inc.1%
Building Material Holding Corp
1%
Sherwin-William’s Company
5%
Lowe’s Companies, Inc
30%
Home Depot, Inc61%
Home Depot, Inc
Lowe’s Companies, Inc
Sherwin-William’s Company
Tractor Supply Company
Building Material HoldingCorpPayless Cashways, Inc.Company Sales (in millions)
Home Depot, Inc 74,517.00
Lowe’s Companies, Inc 37,696.00
Sherwin-William’s Company 6,332.81
Tractor Supply Company 2,247.11
Building Material Holding Corp 1,785.49
Payless Cashways, Inc. 1,195.20
Financial RatiosFinancial RatiosGrowth Rates %
Growth Rates % Company
Industry
S&P 500
Sales (Qtr vs year ago qtr)
8.10 5.60 11.50
EPS (YTD vs YTD) 13.60 13.60 11.90
Dividends (5-Year Annual Avg.)
18.41 21.70 3.58
Rating: Good
Financial RatiosFinancial RatiosPrice Ratios
Rating: Fair
Price Ratios Company
Industry
S&P 500
Current P/E Ratio 16.9 18.3 19.8
Price/Book Value 3.58 3.70 2.86
Price/Cash Flow Ratio 13.10 13.50 12.50
Financial RatiosFinancial RatiosProfit Margin %
Rating: Good
Profit Margins % Company
Industry
S&P 500
Gross Margin 35.0 34.7 47.4
Pre-Tax Margin 10.9 10.6 11.4
Net Profit Margin 6.9 6.6 7.6
Financial RatiosFinancial RatiosFinancial Condition
Rating: Excellent
Financial Condition Company Industry S&P 500
Debt/Equity Ratio 0.09 0.15 1.10
Current Ratio 1.2 1.3 1.5
Interest Coverage 99.3 40.9 3.4
Financial RatiosFinancial RatiosInvestment Returns %
Rating: Excellent
Investment Returns %
Company
Industry
S&P 500
Return On Equity 21.6 20.8 14.7
Return On Assets 12.3 11.7 2.5
Return On Capital 19.8 18.1 7.0
Financial RatiosFinancial RatiosManagement Efficiency
Rating: Fair
Management Efficiency
Company
Industry
S&P 500
Income/Employee 16,000 16,000 26,000
Inventory Turnover 4.5 4.4 8.3
Asset Turnover 1.9 1.8 0.4
Financial RatiosFinancial RatiosSummary
Rating: Very Good
Financial RatiosFinancial Ratios RatingRating
Growth Rate Good
Price Ratios Fair
Profit Margin Good
Financial Condition Excellent
Investment Return Excellent
Management Efficiency Fair
Holding Period ReturnHolding Period Return
Background Analysis:2005 (12/31)
2004 2003200
2
HPR = Ending Price – Beginning Price + Distributions 0.1132
0.2116
0.4863
Beginning Price
Earnings growth rate estimate (2005) 0.1191
Dividend 0.33 0.26 0.21 0.17
Price 47.25 42.74 35.4924.0
2
HPR 0.11320.211
60.486
3
(expected)
Holding Period Return helps the investor to predict the return on the investment over a given period. The Holding Period Return is calculated by determining the historical prices and dividend payouts. As shown above, Home Depot’s holding period return has been decreasing over the past three years..
Free Cash Flow to EquityFree Cash Flow to Equity2005 2004 2003 2002 2001
NI 4,304 3,664 3,044
(+)Depreciation 1,319 1,076 903
(-)Capital Expenditures 3,948 3,508 2,749
(-)∆ in working capital -133 -108 22
(+) ∆ in long-term debt 1,292 -465 71
FCFE 3,447 3,100 875 1,247
(Mil) (Mil) (Mil) (Mil)
Note:
Capital Expenditures 3,948 3,508 2,749
Additions to property, plant, and equipment 3,948 3,508 2,749
(-) Disposition of property and equipment 0 0 0
∆ in working capital =[(CA 02)-(CA01)]-[(CL02)-(CL01)] -113 -108 22
CA 14,190 13,328 11,917 10,361
CL 10,529 9,554 8,035 6,501
∆ in long-term debt =LTD02-LTD01 1,292 -465 71
LTD 2,148 856 1,321 1,250
Estimating Cost of Equity.Ke(Discounted cash flow (DCF)
model) 2005 2004 2003 2002
P0=(FCFE1/Shares0)/(Ke0-G1)
FCFE 12/31/2005
3,446,828,000
3,080,000,000
875,000,000
1,247,000,000
ke0=[(FCFE1/shares0)/P0] +G1 shares outstanding
2,146,000,000
1,985,000,000
2,141,000,000
2,293,000,000
G1=(FCFE1-FCFE0)/FCFE0
G 06/1/2005 0.1191 2.5429 -0.2983
P 06/08/2005 40.34 42.74 35.49 24.02
Ke(required return on equity) 0.1589 0.1597 2.5834 -0.2824
.ke(Constant dividend growth model)
Dividend 0.33 0.26 0.21 0.17
G 0.27 0.24 0.24
P 06/08/2005 40.34 42.74 35.49 24.02
Ke(required return on equity) 0.2774 0.2770 0.2454 0.2440
Po=D1/(ke-G)=>Ke=(D1/Po) +G
EX: Ke2001=(D2002/P2001)+g2002; D2002=D2001(1+g2002); g2002=(D2002 – D2001)/D2001
Risk Analysis2005 2004 2003 2002 2001
BetaHd 1.2536 1.2604 1.37701.261
9 0.8981
Beta= COV(RHd, RS&P500)/VAR(RS&P500)
2004 2003 2002 2001
Unlevered Beta 0.8914 0.9985 0.9370
[Equity/(Equity +((1-T)Debt))]* Beta Equity=Beta unlevered
Equity 22,407 19,802 18,082
Debt 14,749 12,030 10,209
Income from continuing operations before income taxes 6,843 5,872 4,957
Provision for income tax 2,539 2,208 1,913
Tax rate 0.3710 0.3760 0.3859
2005(6/23) 2004 2003 2002 2001
.Ke (CAPM) Rf 0.0375 0.0119 0.0102 0.0163 0.0386
Ke= Rf + Beta(Rm-Rf) Rm-Rf 0.0117 0.1182 0.3206 -0.2261 -0.1497
Beta 1.2536 1.2604 1.3770 1.2619 0.8981
http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html
Ke(required return on equity) 0.0522 0.1609 0.4517
-0.2690 -0.0958
The company is currently underpriced because Ke (DCF model) > Ke (CAPM); 0.1589 > 0.0522
Weighted Average Cost of Capital
Cost of Capital and Optimal Capital Structure: 2004 2003 2002
We= Equity/(Equity+Debt+Preferred Stock) 0.6031 0.6221 0.6391
Wd=Debt/(Equity+Debt+Preferred Stock) 0.3969 0.3779 0.3609
Wp=Preferrd stock/(Equity+Debt+Preferred Stock)
0.0000 0.0000 0.0000
Ke0.2765 0.2453 0.2434
Kd0.0429 0.0594 0.0594
Kp0.0000 0.0000 0.0000
T0.3710 0.3760 0.3859
WACC=We*Ke + Wd*kd*(1-T)+ Wp*Kp WACC
0.1775 0.1666 0.1687
Capital Structure
Debt40%
Equity60%
Debt
Equity
Debt38%
Equity62%
Debt
Equity
2004 Capital Structure
2003 Capital Structure
2002 Capital Structure
Debt36%
Equity64%
Debt
Equity
2002 Capital Structure
Capital Structure
Debt17%
Equity83%
Debt Equity
Debt8%
Equity92%
Debt Equity
2005 Current Capital Ratio
2005 Current Industry Ratio
M & M Proposition ChartM & M Proposition Chart
M&M Model 3(with Tax, Agency Cost, Financial Distress Cost)
0.16870.1666
0.1775
0.16
0.165
0.17
0.175
0.18
0.3609 0.3779 0.3969
D/TA
WA
CC
WACC
Based on the information over the previous three years, Home Depot capital structure follows on M&M model 3 (with Tax, Agency Cost, Financial Distress Cost).
Market EfficiencyMarket Efficiency Company News: June 10, 2004: 9:28 Good News: Home Depot to buy some Kmart
Stores
NO FORM
DateStock Price
16-Jun-04 35.80
15-Jun-04 35.50
14-Jun-04 35.64
10-Jun-04 35.48
09-Jun-04 35.75
08-Jun-04 35.58
07-Jun-04 35.42
Market EfficiencyMarket Efficiency Non Company News: August 13, 2004
Good News: Home Depot Benefits from Hurricane Charley
NO FORM
DateStock
Price
18-Aug-04 36.00
17-Aug-04 35.78
16-Aug-04 33.45
13-Aug-04 33.15
12-Aug-04 33.14
11-Aug-04 33.12
10-Aug-04 33.00
StrengthsStrengths Market Capitalization and Sales Low Insider Ownership Financial Ratios
Investment Return Low Debt to Equity Ratio ~ 38% Profit Margin
Holding Period Return Increasing Dividend & Price
Share Price Free Cash Flow of Equity Stable WACC
WeaknessesWeaknesses
Financial Ratios Price/Earning Ratio
Increasing Beta
Five Year Stock Price Five Year Stock Price IndexIndex
Buy, Sell or Hold?Buy, Sell or Hold?
Recommendations
Current Month
Last Mont
h
Two Months Ago
Three Months Ago
Strong Buy 10 10 9 10
Moderate Buy 2 2 2 2
Hold 8 8 10 10
Moderate Sell 1 0 1 1
Strong Sell 1 2 1 1
Mean Rec. 2.14 2.18 2.26 2.21
ConclusionConclusion Overall Home Depot is a very good
investment. It is currently leading the home improvement industry. The company being number one on its field still is performing better and stronger than competitors.
We recommend strongly in buying the stock because it is currently under priced and holding the stock because the stock has the potential to increase.