Transcript of Company (hd) financial analysis project - team a - final
- 1. BUS 5440 Financial Management Group A The Home Depot
Financial Management Project Company Financial AnalysisFor:
Professor Ana MachucaSubmitted by Team A:Betcher, RhondaCammack,
CherylDesai, ShekharBarnes, JohnBabatunde, LasisiAdamson,
ChristopherSubmission Date: February 26, 2012 Page 1 of 33
- 2. BUS 5440 Financial Management Group A TABLE OF
CONTENTSEXECUTIVE SUMMARY:
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3.COMPANY INTRODUCTION:
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5.FINANCIAL ANALYSIS:
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8.WEIGHTED AVERAGE COST OF CAPTIAL (WACC):
........................................ 11.FUTURE CASH FLOWS:
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16.HISTORICAL STOCK PRICE:
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22.SECURITY ANALYSTS REPORTS:
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25.DIVIDEND and CAPITAL STRUCTURE:
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26.CORPORATE GOVERNANCE:
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28.MERGER and INTERNATIONAL STRATEGY:
.................................................... 29.REFERENCES:
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30. Page 2 of 33
- 3. BUS 5440 Financial Management Group AEXECUTIVE SUMMARY:The
attached report analyzes the financial position of The Home Depot.
Home Depot (HD) is the largest U. S.home improvement retailer as
well as the fastest growing retailer in U.S. history. The company
was foundedin 1978 by four gentlemen who had a vision for a one
stop shop for do-it-yourselfers. The companysheadquarters is in
Atlanta, Georgia and has stores in all fifty states as well as
Canada, Mexico and China.The company is publicly traded on the New
York Stock Exchange (NYSE).Home Depot offers many different
products for the home improvement enthusiast or the
do-it-yourselfer.Some of the products the company offers are:
hardware, plumbing, electrical, building materials, lumber,
paintand flooring to name a few. They also provide services such as
flooring, carpeting and countertopsinstallation, as well as rental
tools. Their customer base includes three different groups:
Do-It-Yourselfers,Do-I-For-Me Customers as well as Professional
Customers. Home Depot is open seven days a week, 24hours a day.Some
of Home Depots largest competitors include companies such as Lowes,
Ace Hardware and Sears.Lowes of course is Home Depots biggest
competition because the two companies offer similar products
andservices.The Home Improvement industry has had some ups and
downs during the last few years mainly due to tougheconomic
conditions. Home Depot found a decrease in the amount of new
construction materials that werepurchased but did see increases in
the amount of home improvement projects. Customers were not looking
topurchase new homes but rather wanted to update and maintain their
existing homes.This report summarizes Home Depots financial
position from 2010 to 2011. Home Depot increased its salesfrom last
year but was 41.3% lower than industry average. The debt to equity
ratio increased by 14.8% from2010 which is still higher than
industry average. Home Depot did increase its net profit margin
from last yearbut was 1.3 points higher than the home improvement
industry. Home Depot continues to outperform theindustry concerning
investments with a Return on Equity (ROE) at 17.1% which is nearly
double that of theindustry. Return on Assets (ROA) also increased
by 7.9% which equates to 29% higher than the industryaverage. An
analysis of Home Depots Weighted Cost of Capital (WACC) shows a
rate of 9.10%. ThisWACC factor shows that Home Depot is competitive
and in alignment with todays marketplace.At the end of March, 2011,
there were approximately 164,000 shareholders as investors of Home
Depot stock.When looking at a trailing 12 month comparison of Home
Depots stock prices, Home Depot outperformed theindustry
competitors as well as the market indices for this period. Since
rebounding from the past financialcrisis during the past few years,
Home Depot for the last year has had a 52 week high of $48.07 and a
52week low of $28.13. Home Depot prices have certainly in the past
year stabilized at high levels making it anattractive investment.
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- 4. BUS 5440 Financial Management Group AAnalysts estimate that
Home Depots earnings will raise from a January 2011 EPS of $2.01 to
$2.32 inJanuary 2012 and $2.75 in 2013 which is 70% higher than
Lowes. Annualized projected EPS growth rate forHome Depot is to
have an EPS growth rate of 14.30% compared to the industry average
of 14.00%. Whencompared to Lowes, Home Depot has twice the market
capitalization. Home Depot has a high gross marginat 34.4% which is
comparable to Lowes at 34.8%. With all things considered, there is
a bullish consensuson Home Depots stock.In summary, it is our
recommendation that investing in Home Depots stock is a good
decision. The companyconsistently out performs its competition
while earning a good return for its investors. The company has
alower risk than the industry and the S&P 500 when it comes to
their betas. The company has a slightly higherdebt to income ratio
which may make it more expensive for the company to borrow.
However, its return onequity shows a good use of equity Home Depot
has remained successful due to its mission to always knowwhat the
customer wants and to provide what the customer wants. Page 4 of
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- 5. BUS 5440 Financial Management Group ACOMPANY
INTRODUCTION:Company HistoryThe Home Depot was founded in 1978 by
Bernie Marcus and Arthur Blank who partnered with Ken Langone,an
investment banker, as well as, Pat Farrah, a merchandising guru.
All four men had a vision to build storeswith one stop shopping for
the do-it-yourselfer. The first Home Depot store was opened in
Atlanta, Georgia onJune 22, 1979. The stores started off smaller
than they are today at 60,000 square feet per store, stocking25,000
SKUs. They even placed empty card board boxes to the ceiling to
give the impression of having moremerchandise.Home Depot is the
fastest growing retailer in U.S. history. The company in 1981 went
public on NASDAQ andthen in 1984 they moved to the New York Stock
Exchange. They realized their fastest growth between 1980and 2000
but are continually finding ways to make their company more
favorable with the consumer. Theypride themselves in developing
their employees and it shows in their product knowledge.Home Depot
is the largest home improvement retailer in the United States. They
have stores in all fifty (50)states as well as Canada, Mexico and
China. Home Depots corporate headquarters is located in
Atlanta,Georgia.StrategyHome Depot proposed in 2010, a
three-pronged initiative in order to fuel more business. The three
areas thatwere reviewed are: supply chain transformation,
merchandise transformation and customer service. The supply chain
initiative includes the roll out of the companys new Rapid
Deployment Centers (RDC).These centers should keep the stores
serviced faster and more effectively. The merchandise
transformation initiative includes the companys commitment to great
value and re-establishing product authority. The customer service
strategy is summed up as taking care of their associates and taking
care ofcustomers. Both of these two parts of the initiative help
with easier return process, guaranteed price matchingas well as
other bonuses.Main Product and ServicesHome Depot stocks and has
available to consumers between 30,000 to 40,000 products during a
year. As ofJanuary 30, 2011, the product mix was as follows: 30.0%
Plumbing, electrical and kitchen items 29.4% Hardware and seasonal
21.7% Building materials, lumber and millwork 18.9% Paint and
flooring Page 5 of 33
- 6. BUS 5440 Financial Management Group AHome Depot continually
strives to offer the products that the do-it-yourselfer is looking
for. They continuallyform strategic alliances and exclusive
agreements with their suppliers in order to provide a large variety
ofrecognizable brands for the consumer. Some examples of the brands
they carry are Behr Premium Pluspaint, Hampton Bay lighting, Vigoro
lawn care products, and Husky hand tools. Martha Stewart
Livingproducts have been well received by Home Depot customers.Home
Depot also offers several different services for the consumer. Some
of the services they offer includeinstallation services for carpet,
cabinets, flooring, water heaters and countertops. Home Depot also
offers toolrentals.Primary Markets and CustomersHome Depot
characterizes their customers into three groups: The Do-It-Yourself
(D-I-Y) Customers This type of customers are homeowners who
purchase theirproducts and go home and do their own projects and
installation. The Do-It-For-Me (D-I-F-M) Customers This type of
customers are homeowners who purchase a productbut would like for
Home Depot to assist them with an installation or just completion
of a project. Professional Customers This type of customers are
general contractors, small business owners,tradesmen, and
repairmen. These customers often take advantage of Home Depots
delivery and will callservices.Major CompetitorsLowes, Ace Hardware
and Sears are some of Home Depots major competitors. Lowes is Home
Depotsbiggest competition because they offer similar product
offerings as Home Depot. Sears is similar to HomeDepot because it
sells Craftsman Tools as opposed to Home Depots line of tools. Ace
Hardware comescloser to Home Depots offerings because of the
variety in their stores. Ace Hardware Stores are usuallymuch
smaller in size than Home Depot thus they cannot offer the number
of different items that Home Depotcan.Industry OverviewThe
Do-It-Yourself or Home Improvement industry is beginning to recover
from the housing crisis that hasoccurred in recent years. Consumers
are beginning to invest in more renovations and remodeling.
Thehousing crisis was very tough for the do-it-yourself market as
consumers were not spending as much moneyas they had before. Until
2016, the home improvement industry is expected to grow by at least
1.4% annually.The U.S. GDP is expected to grow at a rate of 1.8%
signifying that the home improvement industry is in amature phase
of its life cycle because the rate of growth within a ten year
period (2006-2016) is less than theU.S. GDP. Page 6 of 33
- 7. BUS 5440 Financial Management Group AFor Home Depot however,
the reverse can be said for their business during the housing
crisis. Their salesturned around during the crisis and they found
that more consumers were working on do-it-yourself projects,home
maintenance and small furnishings. However, consumers were not
doing any expensive remodelingduring this period. Home Depot was
able to stand out from the rest of the industry because of their
friendlyand knowledgeable people (known as the orange-blooded
associates) by offering some of the freeworkshops and services that
they offered.SummaryWhy has Home Depot been so successful in the
past? Home Depot knows what the consumer wants andprovides what
they want. Home Depot is open seven (7) days a week, 24
(twenty-four) hours a day in order toprovide everyone the
opportunity to get what they want any time that they want. Home
Depot prides itssuccess on the following factors: know your
customers, scale your operation so it can grow rapidly,
marketheavily and keep an eye on your financial
model.References:http://www.ibisworld.com/industry/Dec
2011Fletcher, Fran July 11, 2011
http://blog.highbeambusiness.comhttp://www.masterplans.com/business-plan-articles-homedepothttp://www.hometextilestoday.com/article/529670-Home_Depot_on_path_to_recoveryhttp://corporate.homedepot.com/OurCompany/History/Pages/default.aspx
Page 7 of 33
- 8. BUS 5440 Financial Management Group AFINANCIAL
ANALYSIS:Financial Ratio Analysis for the Home Depot GROWTH RATES %
COMPANY INDUSTRY S&P 500 2010 Sales (Qtr vs. year ago Qtr) 4.4
7.5 11 3.8 Net Income (YTD vs. YTD) NA NA NA 121.9 Net Income (Qtr
vs. year ago Qtr) 12 -2.4 11.2 95 Sales (5-Year Annual Avg.) -2.46
-0.77 7.84 -2.46 Net Income (5-Year Annual Avg.) -9.96 -8.45 7.53
-9.96 Dividends (5-Year Annual Avg.) 18.76 21.97 5.13 18.76 PRICE
RATIOS COMPANY INDUSTRY S&P 500 2010 Current P/E Ratio 19.5
19.2 61.6 18.8 P/E Ratio 5-Year High NA 8.9 14.7 23.7 P/E Ratio
5-Year Low NA 3.2 3.4 8.2 Price/Sales Ratio 1.01 380.98 2.2 0.89
Price/Book Value 3.94 3.26 3.76 3.25 Price/Cash Flow Ratio 13.3
12.1 9.6 12.2 PROFIT MARGINS % COMPANY INDUSTRY S&P 500 2010
Gross Margin 34.4 33.95 38.79 34.3 Pre-Tax Margin 8.4 6.96 17.76
7.8 Net Profit Margin 5.32 4.29 12.85 4.9 5Yr Gross Margin (5-Year
Avg.) 33.8 34.7 39.4 33.8 5Yr Pre Tax Margin (5-Year Avg.) 7.7 7.3
15.9 7.7 5Yr Net Profit Margin (5-Year Avg.) 4.9 4.5 11.4 4.9
FINANCIAL CONDITION COMPANY INDUSTRY S&P 500 2010 Page 8 of
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- 9. BUS 5440 Financial Management Group A Debt/Equity Ratio 0.61
0.53 0.99 0.52 Current Ratio 1.5 1.4 1.2 1.3 Quick Ratio 0.4 0.4
0.7 0.3 Interest Coverage 12 10.7 24.1 11.2 Leverage Ratio 2.3 2.2
3.4 2.1 Book Value/Share 11.53 12.02 20.86 11.64 INVESTMENT RETURNS
% COMPANY INDUSTRY S&P 500 2010 Return On Equity 20.04 10.08
22.16 17.4 Return On Assets 8.9 6.4 6.9 8.2 Return On Capital 12.1
4 9.4 11 Return On Equity (5-Year Avg.) 17.3 9.6 20.5 17.3 Return
On Assets (5-Year Avg.) 8 7.1 6.4 8 Return On Capital (5-Year Avg.)
10.9 7.1 8.7 10.9 MANAGEMENT EFFICIENCY COMPANY INDUSTRY S&P
500 2010 Income/Employee 19,515 14,434 73,059 17,625
Revenue/Employee 367,005 346,090 500,724 359,032 Receivable
Turnover 51.9 34.5 13.2 66.4 Inventory Turnover 4.2 6.2 8.2 4.3
Asset Turnover 1.7 1.6 0.7 1.7Dupont AnalysisROA for 2011 was 8%
and 6.2% for 2010 and ROE for 2011 was 18.68% and 14.38% for the
year prior. Thesetwo ratios can give a good signal to investors
that the company is performing well against 2010. Page 9 of 33
- 10. BUS 5440 Financial Management Group AFinancial ratio
analysisThe company has experienced an increase of sales from last
year but is 41.3% lower than the industry. Its 5year annual sales
average is 1.69% lower than the industry and 1.51% lower in Net
Income compared to theindustry. Dividends remained the same from
last year ,however lower than the industry. The current P/E ratiois
higher than the industry average Book value and Cash Flow ratios
are higher than the industry average.Gross Profit Margin is higher
than last year and higher than the industry. More importantly Home
Depotincreased its Net Profit Margin from last year and is 1.3
points higher than the industry.The debt to equity ratio had
increased 14.8% from last year and is 13.2% higher than the
industry. Thisincrease may raise concern for lenders in the
upcoming year. The Current ratio increased by 13.4% from theyear
prior and remained 6.7% above the industry. The Leverage ratio for
the Home Depot increased by 8.7%from last year this is 4.3% higher
than the industry average. The company had a 1% decrease in its
BookValue/Share ratio which is 4.1% lower than the industry. This
may raise concern for some investors as thebook value of the stock
has performed lower than the industry.The company had outperformed
the industry considerably for its investments. The companys Return
onEquity was nearly double of the industry. Its ROA had increased
from the year prior by 7.9% which is 29%higher than the industry.
The Return on Capital is nearly 3 times that of the industry. The
companysInvestment performance shows the companys rate of return on
its investments has outperformed the industryand is and for the
company.The company has a 26.1% higher income/employee average and
had experienced a 10.7% increase from lastyear. The companys
revenue/employee was 3.2% higher than the year prior and 5.7%
higher than theindustry. This is a good sign than the management is
maximizing its productivity of the workers. InventoryTurnover is
33.3% lower than the industry this may be a signal that the
inventory is staying in the stores toolong before being sold or the
company is buying too much merchandise beyond the demand of its
customers.The company has performed better then the industry on key
ratios for 2011 while improving their performancefrom 2010. The
companys improved performance can be credited to good management
decisions. In 2011the company had experienced high performance
while becoming more
profitable.References:http://investing.money.msn.com/investments/key-ratios?symbol=HD
2/10/2012http://phx.corporate-ir.net/phoenix.zhtml?c=63646&p=irol-reportsannual
2/10/2012 Page 10 of 33
- 11. BUS 5440 Financial Management Group AWEIGHTED AVERAGE COST
OF CAPITAL (WACC):An accurate analysis of a firms WACC requires a
complete data set of inputs to ensure proportionate andprecise
figures are utilized to establish the baseline costs for Equity,
Debt & Preferred Stock. All inputsrequired are indicated below
utilizing several financial models to calculate the required
Inputs. Models such asthe discounted cash flow (DCF) method and the
Capital Asset Pricing Model (CAPM) are utilized in lock stepwith
the analysis of Home Depots financial statements to generate an
accurate (and benchmarked) WACCfactor.Calculated Beta(Using
regression analysis of daily data over 2 year fiscal period)To
ensure alignment with current Home Depot Form 10K filings (last
published January 2011; with fiscal 2012filings due in a week or
two) and the current year now in year-end closing processes, 2
years of data has beenselected as the data sample for calculating
Home Depots beta utilizing regression analysis.Table 4.1 Regression
Analysis Using slope function to Calculate Beta(Sample of two (2)
previous fiscal years of data, total data file contains 506 lines
of daily stock data)The published beta estimates from the recorded
sources (i.e. Yahoo Finance published beta) and theregression
analysis produced beta drawn from the historic stock and market
data analysis do yield figuresthat do differ, but only slightly by
a factor of 0.01 as indicated in the table below. Page 11 of
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- 12. BUS 5440 Financial Management Group ATable 4.2 Home Depot
BetaThe published beta vs. the beta that can calculate using a
scatter diagram and regression analysis will dependon the Analyst
completing the assessment. In our case, we are using 2 full fiscal
years of stock closing pricesas our data sample to establish a
sample size large enough to be utilized.The published beta is
typically calculated against 10 years and in some cases aged
historical data even furtherback in time. The resulting industry
calculated/supplied beta figure captures a larger variance sampling
ofdata to establish the beta coefficient factor used in calculating
Home Depots beta vs. the market.The data selected for the
regression analysis reflects the most recent 2 fiscal years, which
is utilizing historicdata since the impact of the global financial
crisis, reflecting some of the hardest times since the
greatdepression (though in 2012, we are still not out of the woods)
in the calculation of the 0.88 beta figure.Weighted Average Cost of
Capital Inputs(Note: Colour highlight linkages for data sources
& calculations can be followed through the attached
tables)Table 4.3 Calculating Home Depot Stock Expected Growth
RateTable 4.4 Summary of Home Depot Current Market BondsThe above
table illustrates the current Home Depot Bond activity and is being
referenced to permit aneducated approach in assessing and analysing
the firms internal cost of debt for todays market and theproposed
cost of debt rate to be applied in the WACC calculation. Page 12 of
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- 13. BUS 5440 Financial Management Group ATable 4.5 Summary of
Calculation Model InputsAs indicated in the above inputs table, the
cost of equity as calculated using the CAPM model as Table
4.7indicates is 10.16% for the value of rs. The table reflects a
debt rate for internal cost of debt estimated to be5.5%. The
resulting cost of debt after tax factor applied in the WACC formula
as 3.67%; as expected the rateis less than the expected rate of
return for cost of equity.Table 4.6 Corporate Tax Deduction
FigureYields an approximate 33% corporate tax rate (T).Table 4.7
Capital Asset Pricing Model - Required Return = rSThe Expected
Market Return of shareholders and future investors has been
calculated using actual HomeDepot stock data, growth rate forecasts
and ROE figures (as indicated in table 4.5 - Inputs). Page 13 of
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- 14. BUS 5440 Financial Management Group ATable 4.8 Capital
Structure Weighting - Debt, Preferred Stock and EquityHome Depot
has not offered nor has any preferred stock in the market;
effective FY10 the figures reflect $0.00cost of rps.Table 4.9 The
Weighted Cost of Capital (WACC) CalculationHome Depot may actually
have a competitive WACC situation; however, opportunities for
improvement alwaysexist in todays business marketplace. The ratio
of debt is a little light if optimal value in Home depot is to
beachieved. The agents could increase the organizations value while
decreasing the WACC percentage with adifferent capital
structure.Home Depots operations could be maximized while reducing
their WACC factor by increasing the debt ratio ofthe firms capital
structure by 20% to 25% to lower the WACC factor by 17%. If the HDs
debt ratio wasincreased to 40%, therefore maximizing the value of
operations, then the firms WACC would drop to 7.57%from the current
9.10%; but this may make the market unsettled with such a dramatic
shift. To ensure not toomuch risk or uncertainty was injected in to
the business, simply doubling the current ratio from 16% to
32%would still have a positive impact on WACC and the firms
operations by generating a WACC (all thingsremaining unchanged in
rs and rd) of 8.09%, a full percentage point lower.Understanding
that increasing debt also increases the potential of bankruptcy,
but not likely a situation forHome Depot to face with their current
cash reserves and large ratio of the companys assets being
highlyliquid inventory which can be converted to cash quickly being
the company is a retail operation. In addition, Page 14 of 33
- 15. BUS 5440 Financial Management Group Ainterest rates are
low, very affordable and could be financially leveraged to maximize
the cost operationswithout significant increasing fixed monthly
costs through debt repayment schedule. The cost of debt ismuch
lower than the cost of equity; and in Home Depots situation,
investor expectations for investmentreturns, the potential cost of
equity in a bond strategy to raise investment capital are
dramatically greater thancurrent debt costs; after all, the agents
responsibility to increase the firms value and maximize
shareholdervalue initially being achieved with a slightly modified
capital structure and ratios.The two primary components of capital
include the cost of equity and cost of debt to provide or fund
thecapital. WACC is the rate that a firm is expected to pay to
finance its assets and potentially future investmentsin their
operations. The minimum return benchmark that a company must earn
on their existing asset is equalto or greater than the WACC
percentage to meet and ideally satisfy its shareholders, creditors,
and businesspartners like the financial institutions that provide
capital.When evaluating the companys current WACC and benchmarking
our calculations of Home Depots WACCfigure, the investment
resources available online have suggested that our 9.10% results is
fairly accuratebased on the value referenced in the table
below.Benchmarking Home Depots WACC and a few other factors against
other companies in the sameindustry/sector is a fair approach to
assessing if Home Depots WACC is appropriate for the company to
usetoday and in the future. There are several companies listed in
the industry segment; however there is reallyonly one direct
competitor that being Lowes.Table 4.10 Industry
Side-by-SideComparatively, Lowes current capital structure is not
dramatically different with ratios similar to that of HomeDepot.
When judging if the WACC factor is applicable and in alignment with
todays marketplace, then theabove data table results would suggest
yes, Home Depot is competitive and in
alignment.Reference:http://www.nasdaq.com/symbol/hd/historicalhttp://finance.yahoo.com/q/is?s=HDhttp://www.wikiwealth.com/wacc-analysis:hdhttp://money.cnn.com/data/markets/sandp/http://finance.yahoo.com/q/ks?s=HD+Key+Statisticshttp://cxa.marketwatch.com/finra/BondCenter/SearchResult.aspx?q=H
Page 15 of 33
- 16. BUS 5440 Financial Management Group AFUTURE CASH FLOWSThe
Home Depot is a conservative company that has weathered the storm
from the collapse of the housingmarket and credit bubble. The
future looks good for The Home Depot as inflation is predicted to
be modestover the long run and the Federal Reserves target is about
1.9%. (Wall Street Journal) (Economic Projectionsof Fed)The company
is using interest rate swaps and hedging conservatively to manage
risk and keep thecost of debt down. HD has 29 million dollars of
debt maturing in 2012 (Home Depot 10K pg. 44) and is usinghedging
tactics to insulate against volatility in the market as it prepares
to issue more long term debt. HD hasbegun to buy back stock through
a repurchase program and will continue the repurchase of 9.9
billion sharesunder the program. There is no expiration date and
The Home Depot seems to be transferring some of theirdebt from
equity to long term bonds. (Home Depot 10K, pg. 15) This is an
excellent strategy because it willlower the cost of capital and
increase shareholder value.The home improvement market is
competitive and mature. HD realizes that their market share depends
oncreating an advantage through customer service and innovation.
The company is developing their customerbase by concentrating on
their image as well as their service and the greatest asset is the
employees of HomeDepot. (10K, pg. 7) The threats that might affect
growth range from supply chain woes to failure to innovate.(10K pg.
6)Table 5.1 Financial Ratios Snapshot INPUTS 2012 ValuesOperating
RatiosGrowth Rate in Sales 3%Op costs except deprn/Sales
23%Deprn/Net plant & equip. 6%Cash/Sales 1%Account Rec/Sales
2%Inventory/Sales 2%Net plant& Equip/Sales 16%Accounts
Pay/Sales 7%Accruals/Sales 2%Tax Rate 37%Financing DataNotes
payable/Investor-sup cap 3%LT bonds/Investor-sup cap 26%Comm
equity/Investore sup cap 55%Interest rate on notes payable
5.50%Interest rates on LT bonds 5.50%The housing and credit bubbles
could not continue in an artificial state of growth and are now in
the processingof correcting and normalizing. In the calculations
for sales growth, if we were to use the post bubble figures wewould
have a negative growth rate of - 1.56% (Table 5.2). Negative growth
in sales is not the goal of any Page 16 of 33
- 17. BUS 5440 Financial Management Group Acompany so the data
range for sales growth must encompass a greater time period.
Overall growth tends totrend at a more stable pace when covering a
greater time period.Table 5.2 Short term Revenue Movement Year
Revenue (millions) Period Difference 2009 71,288.00 2010 66,176.00
-7% 2011 67,997.00 (forecasted) +3% 2 Year Growth Average: 2%
71,288(1+g)^3 = -1.56% 10 Year Growth Average: 3.78% 53553(1+g)^10=
2.42%Using a greater time period evens out the growth and gives us
a growth rate of 2.42%. This is an excellentplace to begin
forecasting the sales growth for the next three years. The home
improvement market is amature industry and has projected growth of
about 1.4%. The GDP has a projected growth rate of about1.69% and
Home depots growth in sales exceeded 3% in 2010. (See Table 5.3 -
10 Year Growth Rates)Taking the average of the past growth base and
the most current growth we have a growth rate of 3.11% , ifthe home
improvement industry does grow by about 1 to 1.4% it would not be
unthinkable for The HomeDepot to achieve between 4 and 4.5% in
growth over the next year. This is actually a very
conservativeestimate if the market and the domestic economy
continue their slow recovery.Table 5.3 - 10 Year Revenue
Achievement TableYr. 2002 2003 2004 2005 2006 2007 2008 2009 2010
2011Rev $ 53553 58247 64816 73094 81511 90837 77349 71288 66176
67997 G% - +8% +10% +13% +12% +11% -8% -9% -8% +3%Source: Thomson
Business ONELowes ranks second after Home Depot and in terms of
sales HD did 1.5 times the revenue of Lowes. WhileHD has been the
leader in the industry since 2005 there is always the threat that
your competitor will overtakeyou in market share. Lowes had more
growth over the last five years for EPS, and gross revenue compared
toHD. The firm has a very aggressive customer relations strategy
that includes online, contact centers and evenpersonal
representatives that will visit the customer on site. The store
expansion strategy for the companyconcentrates on underpenetrated
urban markets. As Sun Tzu said, Go where your enemy isnt.
(LowesInvestor Relations, 10K) Lowes does trail behind HDs market
share but sales and market share are not static.There is always the
threat that the number two competitor could become the market
leader.In 2007 HD realized that its supply chain management was
inferior. The company undertook an ambitiousproject to bring the
firm into the modern age of inventory deployment. Beginning in 2007
and continuing to2010 HD rolled out 20 Rapid Deployment Centers
that seriously streamlined the inventory delivery process. Atthe
time of inception HDs inventory turnover was 4 and the goal of the
project was to get that number up to 5. Page 17 of 33
- 18. BUS 5440 Financial Management Group AThe Senior Vice
President of Supply Chain Management, Mark Holifield, estimated
that the project couldpossibly give the company an extra 1 billion
dollars in cash flow improvement. As of today the inventoryturnover
ratio is 4.2. This is not disheartening because the system still
needs debugging and the economy willalso impact the efficiency of
the system if it continues to recover. (Supply Chain
Digest)Developing a comprehensive Statement of Future Cash Flows
first requires forecasting future sales. Futuresales are based on
past growth and influenced by industry growth, GDP, inflation,
competition, thecorporations current market share, and future
market share growth. The Home Depot has experiencednegative overall
growth over the past five years. The collapse of the housing market
and the credit debaclecontributed to the decline in sales and the
decline in growth from 2007 to 2009.Table 5.4 Summarized: Current
and Projected Income Statement and Balance SheetPart1 - ISPart2 -
BS Page 18 of 33
- 19. BUS 5440 Financial Management Group AThe Home Depot has
positioned itself for growth in the market through Contact
Relationship Management,Supply Chain Management, and a strategy to
leverage debt and hedge conservatively against the risk. Theeconomy
shows a slow but steady growth and the market should see not only a
recovery from the collapsesbut an increase from possible pent up
demand from unfulfilled need. (Bloomberg Business week) If the
marketexperiences a greater than projected growth and the demand
increases while the market stays stable HomeDepot could see sales
numbers as high as 10% above last years numbers. Page 19 of 33
- 20. BUS 5440 Financial Management Group ATable 5.5 Future /
Projected Cash Flow Statement Future / Projected Cash Flow
Statement 2012 2013 2014Operating Activities (Millions) Net Income
before preferred dividends $ 3,469.6 $ 3,677.8 $ 3,953.6Noncash
adjustments Depreciation and amortization $ 1,687.0 $ 1,788.2 $
1,922.3Due to changes in working capital Increase in accounts
receivable -$ 336.1 -$ 356.3 -$ 383.0 Increase in inventories -$
478.2 -$ 506.8 -$ 544.9 Increase in accounts payable -$ 257.0 -$
272.4 -$ 292.9 Increase in accruals -$ 58.1 -$ 61.5 -$ 66.1Net cash
provided (used) by operating activities $ 4,027.3 $ 4,268.9 $
4,589.1Investing activities Cash used to acquire fixed assets -$
801.4 -$ 849.5 -$ 913.2 Sale of short-term investments $ 0.4 $ 0.4
$ 0.4Net cash provided (used) by investing activities -$ 801.0 -$
849.1 -$ 912.8Financing Activities Increase in notes payable -$
29.6 -$ 31.4 -$ 33.7 Increase in bonds -$ 580.0 -$ 614.8 -$ 661.0
Payment of common and preferred dividends -$ 1,665.4 -$ 1,765.3 -$
1,897.7Net cash provided (used) by financing activities -$ 2,275.0
-$ 2,411.5 -$ 2,592.4Net change in cash and equivilents $ 951.2 $
1,008.3 $ 1,083.9Cash and securities at beginning of the year $
545.0 $ 1,496.2 $ 2,504.5Cash and securities at end of the year $
1,496.2 $ 2,504.5 $ 3,588.4Home Depot could reap the benefits of an
increase in sales far above its projected numbers and this
alongwith a well leveraged debt to assets and debt to equity ratio
would make Home Depot an excellent investment.After reading the
latest report the company looks like it will meet and exceed all of
its projected numbers. HDjust announced a quarterly dividend of .29
cents per share, and a forecast of 2012 earnings of 2.79 per
shareis totally reasonable along with a 4.4% increase in
revenue.Table 5.6 Projected Cash Flows at Current Growth Rate
Corporate ValuationLONG TERM GROWTH RATE WACC = 9.1%S(1+g)n=Sn
4.4%Projected Free Cash Flow: FY1x = FCF x (1+g)/WACC(1-g)Year
Projected Cash CFFY PV of CF (m illion s ) (1,000s ) (1,000s )FY 12
$ 1,496 $ 17,173 $15,741FY 13 $ 2,505 $ 28,747 $24,151FY 14 $ 3,588
$ 39,355 $30,306 Page 20 of 33
- 21. BUS 5440 Financial Management Group AIn consideration of
the current economic conditions and the market projects as
highlighted in the sourcesreferenced below, it can be expected that
Home Depot will continue to experience growth over the next
coupleof years. No one has a crystal ball, but a conservative, yet
confident position is to believe that HD will continueto experience
growth over the next few fiscal periods.References:The Wall Street
Journal, Atlanta Fed Survey Finds Long-Term Inflation Worry by
Michael S Derby, February23, 2012 retrieved from the world wide
web, February 25, 2012 http;//blogs.wsj.comEconomic Projections of
Federal Reserve Board Member and Federal Reserve Bank Presidents,
January 2012retrieved from the world wide web February 25, 2012
www.federalreserve.gov/monetarypolicyThe Home Depot Financial
Report 10K www.ir.homedepot.comLowes Investor Relations, 10K
Investor Relations, http://phx.corporate-irSupply Chain Digest
Aggressive Supply chain Transformation at Home Depot by Dan
Gilmore, June 11, 2009,retrieved from the World Wide Web February
25, 2012 www.scdigest.comBloomberg Business week, Construction Jobs
Rebound Amid U.S. Home Remodeling Pick-Up, by Anna-Louiseand
Anthony Feld, February 22, 2012 retrieved from the world wide web
on February 25, 2012www.bloomberg.com/news/2012-02-22The Washington
Post Home Depot 4th-quarter net income rises 32 percent as revenue
improves, byAssociated Press, February 21, 2012 retrieved from the
world wide web, February 25,
2012www.washingtonpost.com/business/home-depot(The Washington Post,
Associated Press) Page 21 of 33
- 22. BUS 5440 Financial Management Group AHISTORICAL STOCK
PRICE:A trailing 12 month comparison of HD stock prices as compared
with Lowe and the market indices show thatHD has outperformed both
its industry competitors as well as the market indices over this
period. The HDstock appreciated very well and reached its peak
market price during the financial and housing boom of theearly 2005
through 2007. However s the financial crisis hit the building
industry, the entire industry had adownward slope. HD stock hit its
lows in March-April of 2009 when it fell below $ 18.00.It
competitor Lowes fared just as bad with it slows in March-April
2009 being below $ 15.00, since then theindustry has slowly but
sure rebounded and for the last one year HD has had a 52 week high
of$ 48.07 and a52 week low of 28.13. Similarly Lowes has had a 52
week high of $ 28.06 and a 52 week low of $ 18.07.Graph 6.1 HD
PERFORMANCE COMPARED TO MARKET INDICESSplits: Sep 22, 1987 [3:2],
Jul 3, 1989 [3:2], Jul 6, 1990 [3:2], Jun 26, 1991 [3:2], Jul 2,
1992 [3:2], Apr 14, 1993[4:3], Jul 7, 1997 [3:2], Jul 6, 1998
[2:1], Dec 31, 1999 [3:2] Page 22 of 33
- 23. BUS 5440 Financial Management Group AGraph 6.2 HD
PERFORMANCE COMPARED TO LOWESComparing its performance against the
benchmark indices an investment in HD 1985 would have
appreciated14,500% by February 2012 today, while returns in the
S&P 500, NASDAQ and DOW would have respectivelyappreciated
somewhere between 2000% and 2500%. Using its close industry
competitor Lowes asbenchmark, the return would have been
approx.14,500% for HD and 4300% for Lowes.Splits: Sep 22, 1987
[3:2], Jul 3, 1989 [3:2], Jul 6, 1990 [3:2], Jun 26, 1991 [3:2],
Jul 2, 1992 [3:2], Apr 14, 1993[4:3], Jul 7, 1997 [3:2], Jul 6,
1998 [2:1], Dec 31, 1999 [3:2] Page 23 of 33
- 24. BUS 5440 Financial Management Group AGraph 6.3 LONG TERM
COMPARISON OF HD, LOWES AND MARKET INDICESReview of historical data
charts beginning August, 1984 the shares started trading at a price
of $ 15.13. Overthe course of last several years it has undergone a
total of seven 3:2 splits, one 4:3 split and one 2:1 split.Splits:
Sep 22, 1987 [3:2], Jul 3, 1989 [3:2], Jul 6, 1990 [3:2], Jun 26,
1991 [3:2], Jul 2, 1992 [3:2], Apr 14, 1993[4:3], Jul 7, 1997
[3:2], Jul 6, 1998 [2:1], Dec 31, 1999 [3:2]In summary HD prices
have overcome the downs of the financial and housing crisis and now
have stabilized athigh levels making it an attractive investment.
Although past performance is not a guarantee for futureperformance,
based on its historic price trends HD has returned more value to
the shareholders than itscompetitors in the
industry.Reference:http//:www.yahoofinance.com Page 24 of 33
- 25. BUS 5440 Financial Management Group ASECURITY ANALYSTS
REPORTS:The overall analyst recommendation summary for HD is 2.0
(strong buy=1.0, sell=5.0). The current share price$ 44.52 with a
median target of $ 45.00, a high target of $ 50.00 and a low target
of $ 32.00. Analystsestimates of Earnings estimates are raised from
Jan 2011 EPS of $ 2.01 to $ 2.32 in Jan 2012 and 2.75 in2013. This
is an estimated EPS growth rate of 17.70% for 2012 and 15.10% for
2013. Annualized theprojected EPS growth rate is 14.30 % for HD as
compared to 14.00% for the industry and more important a-0.95 for
HD for the last five years. Reviewing the analysts reports from
Credit Suisse, Thomson Reuters andStand & Poors reveals a
positive rating and a buy recommendation. This is based on its Beta
(.0.89), EPS($2.32) with a retention ratio of 50% and ROE of
17.1%Compared to its industry competitor Lowes, HD has twice the
market capitalisation, HD has a gross margin of34.4% which is
comparable to Lowes (34.8%). The two companies P/E ratio are also
comparable and in the19.25 t 19.75 range. HD reported 2011 EPS at $
2.01 and analysts projected 2012 EPS of $ 2.32. This isalmost 70%
higher than Lowes. All things considered there is a generally
bullish consensus on HD stockHowever the caveat is that the stock
is currently near its 52 week high and with the housing market
still in aslump our recommendation would be a hold rather than a
buy. Although this stock has handsomely rewardedthe long term
investors, past performance is not a guarantee of future.Table 7.1
RECOMMENDATION TRENDS Page 25 of 33
- 26. BUS 5440 Financial Management Group A Current Month Last
Month Two Months Ago Three Months Ago Strong Buy 11 10 10 10 Buy 7
7 7 8 Hold 11 11 11 11 Underperform 0 0 0 0 Sell 0 0 0
0Reference:http//:www.yahoofinance.com Page 26 of 33
- 27. BUS 5440 Financial Management Group ADIVIDEND and CAPITAL
STRUCTURE:HD pays currently pays a dividend of 29 cents per quarter
which is $ 1.16 per year. At the current market priceof HD shares
that is a yield of 2.57%. HD has been paying steady dividends for
the last four years. Its currentspending pattern and payout ratio
suggest that this policy is sustainable and will be a good strategy
in todayseconomic environment where shareholders expect dividends
as a form of income.Table 8.1 Dividend Historical Data -
Calculations 2000 to Present(Sample of dividend payout data
beginning 2007)Capital Structure OverviewThe company has a total
Value of $ 66, 444 million. This includes Short term debt of $44
million, Long termdebt of $ 10,739 million and has no preferred
equity. The market Capitalisation (value of Shareholders equity)is
$ 55,661 million. This gives HD a Wd=16.23% and a Ws= 83.77%.
Taking into consideration the Market riskpremium (approx.9.2%) the
Risk free return (currently quoted at 1.98%), the companys Beta
quoted at 0.89)and the business risk premium its cost of Equity is
10.16% while the cost of Debt is 3.67%. WACC (Wd*3.67%+ Ws*10.16%)
is 9.10%.This is in our opinion is a fair WACC because it does not
obligate the company to pay a significant amount ofearnings towards
interest obligations. Also the book value of its Net Debt (Total
Debt Cash and near cashequivalents) on the balance sheet is $ 8549
million ($ 10,739 million + $ 44 million - $ 2234 million). The
bookvalue of its Total Equity is $17, 769 giving it a Net Debt to
Equity ratio of 48.12%.It has operating leases with total liability
of $ 8181 million and Capital leases (long and short term) with
liabilityof $ 452 million. The reason most companies have operating
leases is because these listed off balance sheetand we do not see
anything unusual with this practice. Page 27 of 33
- 28. BUS 5440 Financial Management Group AUsing Insider activity
(buys and sells by management) as well institutional activity as
reported to the SEC as abenchmark HD scores a neutral on the
S&P analysts report suggesting that there is not much
informationalasymmetry. A very high degree of insider buying (apart
from exercising stock options) or a high degree ofinsider selling
would be a reflection of information asymmetry. Also since HD is
not a manufacturer per se,most its efficiencies are operational.
Unlike Apple it does not come out with market changing products
whichwhen launched would significantly impact FCF to cause product
information asymmetry. Table 8.2 INSIDER AND INSTITUTIONAL ACTIVITY
Net Share Purchase Activity Page 28 of 33
- 29. BUS 5440 Financial Management Group A Insider Purchases -
Last 6 Months Shares Trans Purchases N/A 0 Sales 62,161 2 Net
Shares Purchased (Sold) (62,161) 2 Total Insider Shares Held 1.9M
N/A % Net Shares Purchased (Sold) (3.2%) N/A Page 29 of 33
- 30. BUS 5440 Financial Management Group A Net Institutional
Purchases - Prior Qtr to Latest Qtr Shares Net Shares Purchased
(Sold) (63,089,600) % Change in Institutional Shares Held (5.97%)
Data provided by: Thomson FinancialA new generation of lawn mowers
or refrigerators which HD markets will not create the same market
shareprice impact as a new model of iPhone or iPad! In the last six
months less than 3.5% of total insider heldshares and less than
6.0% of Institutional shares were sold. Interestingly the share
prices showed an upwardtrend during this
period.References:http//:www.yahoofinance.comhttp//:www.homedepot.comhttp//:www.thompsonfinancial.com
Page 30 of 33
- 31. BUS 5440 Financial Management Group ACORPORATE
GOVERNANCE:Home Depot have the following set of officers in-charge
of the corporate running of the affairs of the company,Executive
Officers of the company, comprising the Chief Executive Officer
in-charge of the day-to-day runningof the affairs assisted by eight
other executive directors who are appointed by the Board of
Directors of thecompany.The Chief Executive Officer is Francis S.
Blake, who is the chairman as well, and has been in that
positionsince 2007. The other eight directors, have series of
experiences from various backgrounds and had core-competencies in
their various disciplines. Their ages range between 46 to 61 years
of age.In the year 2010, management achieved their first year of
positive sales growth since fiscal year 2006. Thecompanys sales
increased by 2.9% with total sales up of 2.8% over the previous
year. Earnings per yearshare from continuing operations were up
29.7% from last year, reflecting positive sales-growth,
continuingbenefits from their merchandising transformation efforts
and effective expense control. Management is doing agood job from
all indications and parameters, in 2010, they continued to invest
in their business, and theymaintained key focused on
customer-service, supply chain and merchandising initiatives, as
well as thedevelopment of the interconnected retail strategy.As of
March 14, 2011, there were approximately 164,000 shareholders on
record and position approximately1,030,000 additional shareholders
holding stock under nominee security position listings. Executive
stockownership and retention guidelines require executive officers
to hold shares of common stock with a valueequal to the specified
multiples of salary. For fiscal 2010, 25% of the equity
compensation provided to nameexecutive officers was in the form of
performance shares. The directors and executive officers as a group
of 18people owned 1.04% of the common stock, which is 16,371,537,
while institutional investors, by named,Capital World Investors
owned, 193,108,800 shares which is 11.94%. Page 31 of 33
- 32. BUS 5440 Financial Management Group AMERGER and
INTERNATIONAL STRATEGY:At the end of fiscal year 2010, Home Depot
had 179 stores in the ten Canadian provinces, while in Mexico,they
had 85 stores. In China, they had 8 stores in four Chinese cities.
Right now Home Depot is not into anymerger and acquisition. The
stores acquired in those cities of China, were made by acquisitions
in 2006.From Home Depot Support Center, they maintain a global
sourcing merchandising program to source high-quality products from
manufacturers around the world. Home Depot merchant team identifies
and purchasesmarket leading innovative products directly for their
stores. This international strategy has really help HomeDepot to
become a leading Home Improvements outlet. Sourcing offices are
located in Chinese cities ofShanghai, Shenzhen and Dalian and also,
offices in Gurgaon, India, and Rome in Italy, Monterrey in
Mexicoand Toronto in Canada. The company continues to seek
expansion into other countries as expansion andmarket demandsThe
global expansion demonstrates how Home Depot combines its vast
knowledge of the homeimprovements industry with the needs, shopping
trends and customs of each unique geography to the bestserve
customers.Reference:www.yahoofinance.com 2/9/2012 Page 32 of
33
- 33. BUS 5440 Financial Management Group A References &
AppendixReference Sources:http://www.ibisworld.com/industry/Dec
2011Fletcher, Fran July 11, 2011
http://blog.highbeambusiness.comhttp://www.masterplans.com/business-plan-articles-homedepothttp://www.hometextilestoday.com/article/529670-Home_Depot_on_path_to_recoveryhttp://corporate.homedepot.com/OurCompany/History/Pages/default.aspxhttp://investing.money.msn.com/investments/key-ratios?symbol=HD
2/10/2012http://phx.corporate-ir.net/phoenix.zhtml?c=63646&p=irol-reportsannual
2/10/2012http://www.nasdaq.com/symbol/hd/historicalhttp://finance.yahoo.com/q/is?s=HDhttp://www.wikiwealth.com/wacc-analysis:hdhttp://money.cnn.com/data/markets/sandp/http://finance.yahoo.com/q/ks?s=HD+Key+Statisticshttp://cxa.marketwatch.com/finra/BondCenter/SearchResult.aspx?q=HDividend
Table 8.1 Page 33 of 33