At The Home Depot, dedication to serving customers and providing them with the ultimate shopping experience is everyone’s priority. Maintaining this focus and commitment is a leadership team that believes their company values and commitment to great customer service will create value for all stakeholders. Working in a Store Support Center, rather than a corporate headquarters, the Home Depot leadership knows that the most important people in the fabric of our company are the store associates and store leadership teams. Under Nardelli’s leadership, The Home Depot has set a clear strategy for continued growth by enhancing its core retail network through distinctive and innovative merchandise, store modernization and technology investment; extending its business through new store formats, online sales and installation services; and by expanding to new geographies and professional customer segments.
The Home Depot’s 5%/Insider Ownership is 1.87%. The low number indicates that Home Depot is not a family owned nor operated company. There is not family relationship between any of the Board Members. Suggestions for the Board The Board of Directors owns less than 5% of Home Depot’s stock. Some may view this as something positive because it may create a conflict of interest, but if the board owned more stock, they would treat the company more as their own and manage it more competitively. Seeing as the company’s stock has not increased dramatically or even attracted enough new investors to the company, a more active approach to management might be necessary to stimulate the company. Therefore, Home Depot has taken a more conservative approach in their business strategies. By allowing the board to take more ownership, this will allow room for growth and a little more risk therefore giving the company a more competitive/aggressive approach equaling more individual profits for the board.
Every Home Depot stocks over 40,000 different home improvements related items. These items are spread across several different departments within the store including building materials, millwork, plumbing, kitchen & bath, paint, floor & wall, tools, hardware, electrical, lawn and garden. Selections may vary from store to store because Home Depot store are always stocked with merchandise that is localized to match the areas specific needs.
The Market Capitalization Chart shows the top five (5) industries in the Home Improvement Industry. Home Depot is the leader, generating 63% of the sales in this industry. It is twice as large as Lowe’s Co. their closest competitor.
Industry Pie Chart shows the top 6 industries in Service Retail (Home Improvement). Home Depot generated 61% of most of the sales and their closest competition Lowe’s generated 30%.
In accordance to the above ratios of Sales, EPS, and Dividends, Home Depot is growing, thus Home Depot’s growth rate is evaluated to be GOOD . ----- Growth rate percentage is used to evaluate how much a company would grow in the future. It is calculated based on Sales, EPS, and Dividends. Home Depot’s Sales plays an important role in the company’s output due to the fact that the more sales the greater the gross profit margin. Home Depot’s sales are shown to be 8.10, and in comparison to the industry’s, 5.60, are evaluated to be doing much better. However, when in comparison to S&P 500 which is at 11.50, it is selling 3.40 less, yet since it is still doing better than the industry the overall sales percentage is FAIR . The Earnings per share (YTD vs. YTD) ratio is used to show the sum of retained earnings weigh against the shares outstanding. When evaluating EPS the higher the EPS, the higher the dividends to shareholders, meaning maximization of shareholder’s wealth. Home Depot’s EPS is the same as that of the industry’s, and is better than that of S&P 500 by 1.70. Therefore the overall EPS is evaluated to be GOOD . Home Depot’s dividend yield in 5- Year Annual Average is below the industry’s by 3.29 shows that company is retaining more, yet surpasses that of S&P 500 by 14.83. Meaning that because it has a high dividend yield it probably doesn’t have a high expected future growth, thus its overall dividends is evaluated to be GOOD.
In accordance to the above ratios of P/E, P/B Value, and P/C Flow, Home Depot has a low ratio numbers meaning that there are other companies in its field performing better and are stronger. Therefore Home Depot has price ratios that are OVERALL evaluated at being FAIR. -------------- The above price ratios determine a company’s risk, and the growth prospect of its earnings in comparison to the entire market. Price per Earnings, Price per Book Value, and Price per Cash Flow ratios are all used to calculate the company’s overall risk. The Price/ Earning Ratio for Home Depot is 16.9, which is below both the industry and S&P 500. This means that Home Depot is at a higher risk, due to its lower P/E ratio than other companies in both the industry and S&P 500. Therefore Home Depot’s Current P/E Ration is evaluated at being POOR. The Price/ Book Value , which is used to compare between the stock’s actual book value and the stock value, should be a high value. In comparing Home Depot’s P/B value it’s slightly lower than the Industry, but higher than the S&P 500. Therefore Home Depot’s overall Price/ Book Value is evaluated at being FAIR. The Price/Cash Flow Ratio assesses the freedom of cash the company has, thus the higher the ratio, the more cash the company has to use. Home Depot’s P/C flow is slightly below by 0.40 the industry yet is above the S&P 500. Therefore Home Depot’s overall Price/Cash Flow Ratio is evaluated at being FAIR.
In accordance to the above ratios of Gross Profit Margin , Pre-Tax Margin, and Net Profit Margin, Home Depot is making a small profit with in its industry, but isn’t as profitable in comparison to the S&P 500. Therefore Home Depot has profit ratios that are OVERALL evaluated at being GOOD. -------------- Profit margins demonstrate the company’s ability to produce with cost efficiency and sell at a price, which can bring in revenue. Gross Profit Margin is the Sales minus the Cost of Goods Sold divided by Sales. The higher the gross margin, the more profitable the company is. Home Depot’s gross profit margin is 0.3 better than the industry and is 12.4 below S&P 500. This means that it is a relatively high profit company in its industry but not in the S&P 500. Therefore Home Depot’s gross profit margin is evaluated at being FAIR. The Pre-Tax Margin Ratio is the net profit margin before tax has been deducted. Home Depot’s Pre- Tax Margin is slightly higher than the Industry, yet still lower than the S&P 500. Therefore Home Depot’s pre-tax margin is evaluated at being FAIR. The Net Profit Margin Ratio shows the profitability of the company’s sales after all expenses have been paid off. Home Depot’s Net Profit Margin is higher than the industry by 0.3 and below S&P500 by 0.7. Thus, meaning that the company is earning more than the industry, but not enough as the S&P 500 average. Therefore Home Depot’s net profit margin is evaluated at being FAIR.
In accordance to the above ratios of Debt/Equity, Current and Interest Coverage, Home Depot is a stable company that has little debt and is able to provide cash if needed in the immediate future. Therefore Home Depot’s Financial Condition is overall evaluated at being EXCELLENT. -------------- The Financial Condition of the Company depends on the Debt/ Equity, Current, and Quick ratios to name a few help point out and evaluate the company’s activities. The Debt/Equity ratio shows how much debit the company has in excess of its equity. If the company has less then 1 then that means it has more equity than debt, which is a good thing. Home Depot’s D/E is .09 which is way below 1 and also under the industry and S&P 500. Therefore Home Depot’s debt/equity is evaluated at being EXCELLENT. The Current Ratio is equal to the total current assets divided by the current liabilities and shows how well the company can provide cash in the near future. Home Depot’s Current Ratio is slightly below both the industry and the S&P 500, yet still above 1. Therefore Home Depot’s current ratio is evaluated at being FAIR. The Quick Ratio is equal to total current assets minus inventories and divided by the total current liabilities and also indicates how well the company can provide cash in the near future. Home Depot’s quick ratio is just above the industry, but below the S&P 500, meaning that there are other companies out in the market with a higher ratio. Therefore Home Depot’s quick ratio is evaluated at being FAIR.
In accordance to the above ratios of Investment Returns, the company is getting more sales form equity and they are efficiently utilizing their asset to acquire sales thus Home Depot investment returns are EXCELLENT . -------------- Investment returns are the annually compounded rate of return you expect from your investments before taxes, i.e. it is a company’s profitability. Return on Equity is an indicator of profitability. It is determined by dividing net income for the past 12 months by common stockholder equity (adjusted for stock splits). Result is shown as a percentage. Investors use R.O.E. as a measure of how a company is using its money. Home Depot R.O.E is 21.6, which are higher than the industries of 20.8, and the S&P 500 ratios of 14.7 thus show that Home Depot is doing EXCELLENT. Return on Assets is an indicator of profitability. It is determined by dividing net income for the past 12 months by total average assets. Result is shown as a percentage. ROA can be decomposed into return on sales (net income/sales) multiplied by asset utilization (sales/assets). Home Depot’s R.O.A is 12.3 which are higher than the industries of 11.7 and the S&P 500 of 2.5, this indicates that the Home Depot is doing EXCELLENT. Return on Capital measures of how effectively a company uses the money (borrowed or owned) invested in its operations. Return on Capital is equal to the following: net operating income after taxes/ [total assets minus cash and investments (except in strategic alliances) minus non-interest-bearing liabilities]. Home Depot’s R.O.C is 19.8, which is much higher than the industries of 18.1 and the S&P 500 of 7.0; this indicates that Home Depot is doing EXCELLENT.
In accordance to the above ratios of management efficiency, Home Depot is FAIR . -------------- Management Efficiency determines how well the firm assets are being managed. Receivables Turnover Ratio is a company’s activity ratio, measuring how efficiently a firm uses its assets. A high ratio implies that the company operates either on a cash basis, or its extension of credit and collection of accounts receivable is efficient. Home Depot receivable turnover ratio of 42.9 is lower than the industries of 50.8 and much higher than the S&P 500 of 7.4; this shows that the company is doing FAIR. Inventory Turnover is a ratio that shows how many times the inventory of a firm is sold and replaced over a specific period. A low turnover implies poor sales and, therefore, excess inventory. A high ratio implies either strong sales or ineffective buying. Home Depot inventory turnover is 4.5, which higher than the industries of 4.4 and lower than S&P 500 8.5, this indicates that Home Depot inventory turnover is FAIR. Asset Turnover measures the firm’s efficiency at using its assets in generating sales or revenue the better. It also indicates pricing strategy: companies with low profit margin tend to have high asset turnover; those with high profit margins have low asset turnover. Home Depot asset turnover of 1.9 is higher than the industries of 1.8, and the S&P 500 ratios of 0.4, therefore this shows that Home Depot asset turnover is GOOD.
After evaluating all the ratios, Home Depot is doing very well because the company’s investment return is good higher than both industry and S&P 500 because the company is doing well on handling their equity and assets, the financial condition of the company is in good standing, the profit margins shows that the company is profitable, management efficiency is acceptable, the growth rates shows a lot of promise for growth, the price/earning ration of the company is fair and determines a company’s risk. The company being risky is not necessarily a bad thing it explains why the investment return is higher. It shows that the company even though number one in its field needs to find new innovative ideas to keep on performing better and stronger. Finally, the overall performance shows that Home Depot is a very good investment.
Holding Period Return helps the investor to predict the return on the investment in a particular share. 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.
Businesses need cash to grow, pay salaries, research cost, and dividends. As an investor, you want to know whether you company can afford to complete all of this things mentioned. This can be answered best by calculating Free Cash Flow. By using Home Depot’s 10-K file, we have noted its net income, depreciation, capital expenditures, change in working capital, and change in long-term debt. Using this information we have calculated the company’s free cast flow for 2002, 2003, and 2004. The cash flow for 2004 increased 3.52 times than year 2003. Where as, there is only a slightly increase of cash flow in 2005 due to the significant increase of long debt and net income.
In 2005, the stock has a return of 15.89% according to the discounted cash flow model. It is slightly lower than 2004, which means that the company will probably be paying lower dividends due to increasing growth rate. -- The backed out estimate of the discount rate is UNREALISTIC due to the variance in the current price and estimated growth rates used to calculate K via the Discounted Cash Flow Method. The current or estimated rates are held constant over the forecasted period. In actuality these rates fluctuate and are subject to change periodically while adjusting to changes in market conditions. Investors should note that the required return is an estimate, and although this model is not realistic it provides an idea of what results may be expected.
Beta has been increasing from 2001 to 2003 and stabilized by 2004 thru 2005. The higher beta value means the investment has higher risk and higher returns, vice versa. From our calculation, in 2005, the Home Depot Inc. has beta 1.2536, higher than 1, meaning it is risky to invest in this company. The actual definition of beta is = Cov (Rhd, Rs&p500) / 2 Rs&p500 In order to calculate beta, we use the above equation, where Cov (Rhd, Rs&p500) is the covariance between the return on the Home Depot and the return on the market portfolio S&P 500 and then divided by 2 Rs&p500, which is the variance of the S&P 500. Besides that, the adjusted closing price for The Home Depot was used in calculating beta because the adjusted price reflected stock splits or dividends paid (if any) during the year. It is a good time to buy the company stock now because it is still underpriced and has a lot of potential to grow.
Weighted average cost of capital, using three component costs (debt, preferred equity and common equity) to calculate an overall estimate for the firm’s cost of capital by using weighted average of the component costs . The ‘weights’ depends on how much funding comes from each source of funds. Since Home Depot has not issued any preferred stock, Wp*Kp equals to zero. The Capital Structure of the Company is the sum of the value of the firm’s debts and its equity. The goal of the Optimal Capital Structure is to maximize the value of the firm and to minimize the firm’s weighted Cost of Capital. From the calculation, the WACC of Home depot is fairly stable over the past three years, ranging from roughly 16.51% to 17.8%. These numbers mean the cost of funding for Home depot in 2004 is 17.8% and so on.
Home Depot’s capital structure has remained relatively stable between years 2002-2004. However, there has been a slight increase in debt since 2002. Home Depot issued no preferred stock.
Compared to the industry, Home Depot’s debt to equity ratio is good. Home Depot’s ratio is .09 vs. the industry’s ratio of .15.
WACC decreased from 2002 to 2003 and then up again in 2004. The value of the firm was increasing and maximized over the period between 2002 and 2003 because Home Depot had the lowest WACC in 2003. However, the value of firm decreased in 2004 because the WACC jumped from 0.1666 to 0.1775 within a year. Home Depot Company has been increasing its long term debt and decreasing equity slowly according to the capital structures pie charts and because of that the firm value is being led away form maximization and the cost is not being minimized. Yet Home Depot’s Debt to Equity is still better than industry, which explains why the company is still number one in its industry.
Days before the announcement was made that Home Depot would purchase 24 store locations; Home Depot’s stock prices were steadily decreasing. Based on the graph, our conclusion would be that the company specific news had a positive impact on the company. The purchase of K-Mart was good news for shareholders. This would be considered a no form .
Summer 2004 is one that Floridians would like to forget. The destructive hurricanes, which hit Florida, could be considered good news for all home improvement stores. Home Depot largely benefited from this disaster. Several days before the announcement of hurricane Charley hitting land, the company’s stock prices were fluctuating. This would be considered a no form .
Market Capitalization and Sales -Home Depot is the leader of the home improvement industry, they are number one in market capitalization and sales. Financial Ratios -Investment return is higher more than industry and S&P 500. The company is doing well in handling their equity and assets. Home Depot is in good financial standing and its debt to equity ratio is still better than industry even though the company has an increase of debt. The company’s growth rates have a lot of potential for growth. The Profit margin of the company is still better than the industry. Share Price - Home Depot’s stock is currently under priced and shows a lot of growth potential. Free Cash Flow of Equity - FCFE has been increasing because net income of the company has been increasing, which the company can use to make investments and researches that could make the company grow.
Market Efficiency- The company has a weak form of market efficiency, which means the security price only, reflect all information found in the past price and trading volume and Insiders can earn excess return. Beta -The Beta of the company is high which means that the company has a higher risk and also a higher return. Financial Ratios- The Price/Earnings ratios were below the Industry and S&P 500 which means that Home Depot is at higher risk and other companies in its industry is performing better and more cost efficient. Insider/Ownership -5% insider ownership is very low it’s only 1.87 % which means its not a family oriented business but if the board owned more stock the company might have a more competitive/aggressive approach.
The mean Recommendation Average suggests that shareholders should HOLD their stocks, and the majority of the Analyst recommend Strong Buy to Hold . These recommendations imply that the value of the stocks will increase in the future.
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 needs to find innovative ideas to keep on performing better and stronger than competitors and also to stay on top of the industry. Suggestions would be to improve market efficiency and use the optimal capital structure that maximized the firm’s value and minimized the cost. 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.
Presented by: Clarisa Estrada Agnes King Bach Tran Wan Bon Woo
What is Home Depot? <ul><li>The Home Depot is the world’s largest home improvement retailer and second largest retailer in the United States. </li></ul><ul><li>It has been recognized by Fortune as the #1 most Admired Specialty Retailer for 2005. </li></ul><ul><li>It is the fastest growing retailer in history; the first to reach $30 Billions, then $40 Billions and now $50 Billions in sales! </li></ul>
Home Depot History <ul><li>In 1978 Bernie Marcus and Arthur Blank from Atlanta, Georgia developed the concept and corporation of a company named “MB associates.” </li></ul><ul><li>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. </li></ul>
Composition of the Board <ul><li>ROBERT L. NARDELLI , age 56, has been President and Chief Executive Officer since December 2000 and Chairman since January 1, 2002. </li></ul><ul><li>Prior thereto, Mr. Nardelli served as President and Chief Executive Officer of GE Power Systems, a division of General Electric Company, since 1995. </li></ul>
5% Insider Ownership 4 98.13 Float (%) 1.87 5%/Insider Ownership (%) 24.82 Mutual Fund Ownership (%) 25.31 Top 10 Institutions (%) 63.60 Institutional Ownership (%) 2.16 Bil Shares Outstanding Ownership Information
Percentage of Revenue for Fiscal Year 19.7% 14,399.52 Plumbing, Electrical, and Kitchen 24.4% 17,834.94 Building Materials, Lumber and millwork 26.9% 19,662.29 Hardware and Seasonal 29% 21,197.26 Paint, Flooring, and Wall Covering % Total Sales (in millions) Product Group category
Major 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 0% $122.83 Griffin Land and Nurseries Inc 1% $890.15 Building Materials Holding Corp 3% $4,430 Fastenal Co. 33% $44,420 Lowe’s Companies, Inc 63% $86,220 Home Depot, Inc Percent of Capitalization Market Cap (in Millions) Company
Industry Chart 1,195.20 Payless Cashways, Inc. 1,785.49 Building Material Holding Corp 2,247.11 Tractor Supply Company 6,332.81 Sherwin-William’s Company 37,696.00 Lowe’s Companies, Inc 74,517.00 Home Depot, Inc Sales (in millions) Company
Financial Ratios Growth Rates % Rating: Good 3.58 21.70 18.41 Dividends (5-Year Annual Avg.) 11.90 13.60 13.60 EPS (YTD vs YTD) 11.50 5.60 8.10 Sales (Qtr vs year ago qtr) S&P 500 Industry Company Growth Rates %
Financial Ratios Price Ratios Rating: Fair 12.50 13.50 13.10 Price/Cash Flow Ratio 2.86 3.70 3.58 Price/Book Value 19.8 18.3 16.9 Current P/E Ratio S&P 500 Industry Company Price Ratios
Financial Ratios Profit Margin % Rating: Good 7.6 6.6 6.9 Net Profit Margin 11.4 10.6 10.9 Pre-Tax Margin 47.4 34.7 35.0 Gross Margin S&P 500 Industry Company Profit Margins %
Financial Ratios Financial Condition Rating: Excellent 3.4 40.9 99.3 Interest Coverage 1.5 1.3 1.2 Current Ratio 1.10 0.15 0.09 Debt/Equity Ratio S&P 500 Industry Company Financial Condition
Financial Ratios Investment Returns % Rating: Excellent 7.0 18.1 19.8 Return On Capital 2.5 11.7 12.3 Return On Assets 14.7 20.8 21.6 Return On Equity S&P 500 Industry Company Investment Returns %
Financial Ratios Summary Rating: Very Good Excellent Investment Return Fair Management Efficiency Excellent Financial Condition Good Profit Margin Fair Price Ratios Good Growth Rate Rating Financial Ratios
Holding Period Return 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.. (expected) 0.4863 0.2116 0.1132 HPR 24.02 35.49 42.74 47.25 Price 0.17 0.21 0.26 0.33 Dividend 0.1191 Earnings growth rate estimate (2005) Beginning Price 0.4863 0.2116 0.1132 HPR = Ending Price – Beginning Price + Distributions 2002 2003 2004 2005 (12/31) Background Analysis:
Free Cash Flow to Equity 1,250 1,321 856 2,148 LTD 71 -465 1,292 ∆ in long-term debt =LTD02-LTD01 6,501 8,035 9,554 10,529 CL 10,361 11,917 13,328 14,190 CA 22 -108 -113 ∆ in working capital = [(CA 02)-(CA01)]-[(CL02)-(CL01)] 0 0 0 (-) Disposition of property and equipment 2,749 3,508 3,948 Additions to property, plant, and equipment 2,749 3,508 3,948 Capital Expenditures Note: (Mil) (Mil) (Mil) (Mil) 1,247 875 3,100 3,447 FCFE 71 -465 1,292 (+) ∆ in long-term debt 22 -108 -133 (-)∆ in working capital 2,749 3,508 3,948 (-)Capital Expenditures 903 1,076 1,319 (+)Depreciation 3,044 3,664 4,304 NI 2001 2002 2003 2004 2005
Estimating Cost of Equity EX: Ke 2001 =(D 2002 /P 2001 )+g 2002 ; D 2002 =D 2001 (1+g 2002 ); g 2002= (D 2002 – D 2001 )/D 2001 Po=D1/(ke-G)=>Ke=(D1/Po) +G 0.2440 0.2454 0.2770 0.2774 Ke (required return on equity) 24.02 35.49 42.74 40.34 P 06/08/2005 0.24 0.24 0.27 G 0.17 0.21 0.26 0.33 Dividend . ke(Constant dividend growth model) -0.2824 2.5834 0.1597 0.1589 Ke (required return on equity) 24.02 35.49 42.74 40.34 P 06/08/2005 -0.2983 2.5429 0.1191 G 06/1/2005 G 1 =(FCFE 1 -FCFE 0 )/FCFE 0 2,293,000,000 2,141,000,000 1,985,000,000 2,146,000,000 shares outstanding ke 0 =[(FCFE 1 /shares 0 )/P 0 ] +G 1 1,247,000,000 875,000,000 3,080,000,000 3,446,828,000 FCFE 12/31/2005 P 0 =(FCFE 1 /Shares 0 )/(Ke 0 -G 1 ) 2002 2003 2004 2005 .Ke(Discounted cash flow (DCF) model)
Risk Analysis The company is currently underpriced because Ke (DCF model) > Ke (CAPM); 0.1589 > 0.0522 -0.0958 -0.2690 0.4517 0.1609 0.0522 Ke (required return on equity) http://mba.tuck.dartmouth.edu/pages/faculty/ ken.french/data_library.html 0.8981 1.2619 1.3770 1.2604 1.2536 Beta -0.1497 -0.2261 0.3206 0.1182 0.0117 Rm-Rf Ke= Rf + Beta(Rm-Rf) 0.0386 0.0163 0.0102 0.0119 0.0375 Rf .Ke (CAPM) 2001 2002 2003 2004 2005(6/23) 0.3859 0.3760 0.3710 Tax rate 1,913 2,208 2,539 Provision for income tax 4,957 5,872 6,843 Income from continuing operations before income taxes 10,209 12,030 14,749 Debt 18,082 19,802 22,407 Equity [Equity/(Equity +((1-T)Debt))]* Beta Equity=Beta unlevered 0.9370 0.9985 0.8914 Unlevered Beta 2001 2002 2003 2004 Beta= COV(R Hd , R S&P500 )/VAR(R S&P500 ) 0.8981 1.2619 1.3770 1.2604 1.2536 Beta Hd 2001 2002 2003 2004 2005
Weighted Average Cost of Capital 0.1687 0.1666 0.1775 WACC WACC=We*Ke + Wd*kd*(1-T)+ Wp*Kp 0.3859 0.3760 0.3710 T 0.0000 0.0000 0.0000 Kp 0.0594 0.0594 0.0429 Kd 0.2434 0.2453 0.2765 Ke 0.0000 0.0000 0.0000 Wp=Preferrd stock/(Equity+Debt+Preferred Stock) 0.3609 0.3779 0.3969 Wd=Debt/(Equity+Debt+Preferred Stock) 0.6391 0.6221 0.6031 We= Equity/(Equity+Debt+Preferred Stock) 2002 2003 2004 Cost of Capital and Optimal Capital Structure:
Capital Structure 2004 Capital Structure 2003 Capital Structure 2002 Capital Structure 2002 Capital Structure
Capital Structure 2005 Current Capital Ratio 2005 Current Industry Ratio
M & M Proposition Chart 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 Efficiency <ul><li>Company News: June 10, 2004 : 9:28 </li></ul><ul><li>Good News: Home Depot to buy some Kmart Stores </li></ul>NO FORM 35.42 07-Jun-04 35.58 08-Jun-04 35.75 09-Jun-04 35.48 10-Jun-04 35.64 14-Jun-04 35.50 15-Jun-04 35.80 16-Jun-04 Stock Price Date
Market Efficiency <ul><li>Non Company News: August 13, 2004 </li></ul><ul><ul><li>Good News: Home Depot Benefits from Hurricane Charley </li></ul></ul>NO FORM 33.00 10-Aug-04 33.12 11-Aug-04 33.14 12-Aug-04 33.15 13-Aug-04 33.45 16-Aug-04 35.78 17-Aug-04 36.00 18-Aug-04 Stock Price Date
Strengths <ul><li>Market Capitalization and Sales </li></ul><ul><li>Low Insider Ownership </li></ul><ul><li>Financial Ratios </li></ul><ul><ul><li>Investment Return </li></ul></ul><ul><ul><li>Low Debt to Equity Ratio ~ 38% </li></ul></ul><ul><ul><li>Profit Margin </li></ul></ul><ul><li>Holding Period Return </li></ul><ul><ul><li>Increasing Dividend & Price </li></ul></ul><ul><li>Share Price </li></ul><ul><li>Free Cash Flow of Equity </li></ul><ul><li>Stable WACC </li></ul>
Weaknesses <ul><li>Financial Ratios </li></ul><ul><ul><li>Price/Earning Ratio </li></ul></ul><ul><li>Increasing Beta </li></ul>
Buy, Sell or Hold? 2.21 2.26 2.18 2.14 Mean Rec. 1 1 2 1 Strong Sell 1 1 0 1 Moderate Sell 10 10 8 8 Hold 2 2 2 2 Moderate Buy 10 9 10 10 Strong Buy Three Months Ago Two Months Ago Last Month Current Month Recommendations
Conclusion <ul><li>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. </li></ul><ul><li>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. </li></ul>