PowerPoint

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


Fastenal Co.


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%


$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%


30%

Home Depot, Inc61%

Home Depot, 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



Debt36%

Equity64%

Debt

Equity


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.

PowerPoint

Business

Transcript of PowerPoint