Risk

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The Home Depot
By Mike Sartorius
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Presentation Outline

• Past Position
• Company Profile
• Pertinent News
• Financial Statements
• Industry Comparison
• Stock Comparison 1 and 3 year
• Trend Analysis
• Common Size Analysis

• Stock Valuations
• EVA MVA Model
• Summary of Valuations
• Analysts Recommendation
• Why is this stock for SMIP
• Recommendation

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Snapshot

• Market Cap 85,666 million
• What Industry Retail (Home Improvement)
• What Sector Services
• Recent Stock Price 39.25
• 52 Week High 39.95
• 52 Week Low 31.93
• Beta .94
• Ticker Symbol HD

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Past Position

• Number of Shares 75
• Date Purchased November 1999
• Date Sold March 2003
• Buy Price 54.03
• Sell Price 22.59
• Approximate Loss (2357.94)

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Graph of Past Position
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Profile

• The Home Depot was founded in 1978 in Atlanta,
  Georgia and has since become the world's largest
  home improvement retailer, operating more than
  1,700 stores (Home Depot, EXPO, and other
  subsidiary companies) in the United States,
  Mexico, and Canada.
• Home Depot stores stock approximately 40,000 to
  50,000 different kinds of building materials,
  home improvement supplies, décor and lawn and
  garden products that are sold to
  do-it-yourselfers, home improvement contractors,
  trades people, and building maintenance
  professionals.

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Profile Continued

• Expo Design Center stores sell products and
  services primarily for home decorating and
  remodeling projects.
• Other subsidiary companies under the Home Depot
  parent company, primarily distribute products and
  sell installation services to businesses and
  governments.
• Home Depots biggest competitors are Lowes,
  Sears, and other small hardware stores.

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Pertinent News

• September 21, 2004 - Home Depot Recruiting
  Military Spouses
• Home Depot, which averages a new store opening
  every 48 hours, said its effort with the Defense
  Department also will involve hiring more
  veterans, active duty service members about to be
  discharged, National Guard members and
  reservists.
• October 12, 2004 - Home Improvement Industry
  Pursues Hispanic Market
• The U.S. home improvement industry is looking to
  build business with U.S. Hispanics in hopes of
  cashing in on a market that could be as big as
  30 billion.
• Note Home Depot estimates a 900 billion global
  home improvement market opportunity.

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Pertinent News

• October 10, 2004 - Shares of Home Depot Look
  Undervalued
• Home Depot accounts for 18 percent of this
  market, more than twice the amount of Lowe's,
  which has about 1,000 stores. Analysts polled by
  Reuters expect Home Depot to post per-share
  profit of 2.21 in fiscal 2005, which ends in
  January, and 2.53 in fiscal 2006.
• Home Depot rolled out its first store in
  Manhattan last month. Chief Executive Robert
  Nardelli is emphasizing strategic expansion, with
  hopes to open more than 200 stores per year. He
  is also emphasizing new higher-end products,
  improved customer service and more reliance on
  information technology.

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Pertinent News

• September 22, 2004 - Home Depot, Lowe's see
  strong post-hurricane demand
• "We're 10 weeks after Charley and are still
  seeing a tremendous amount of rebuilding activity
  in Southwest Florida, which leads us to believe
  that we will have a rebuilding phase going on for
  quite a while throughout the state.

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Financial Statements

• Please Refer to Handout

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Industry Comparison
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Industry ComparisonContinued
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Stock Comparison 1 year
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Stock Comparison3 years
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Trend Analysis
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Trend AnalysisContinued
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Common Size Analysis
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Free Cash Flow Inputs(18)
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Free CashFlow Model (18)
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Free Cash Flow Inputs(12)
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Free CashFlow Model (12)
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EVA MVA Inputs
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EVA MVA Model
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Alternative ValuationInputs
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Alternative ValuationRatios
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Alternative ValuationModel
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Basic Valuations Inputs
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Basic ValuationModels
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Summary of Valuations

• Basic Stock Valuations 76.54 or 19.47
• EVA MVA Creating Shareholder Value
• Free Cash Flow (18) 45.33
• Free Cash Flow (12) 28.38
• Value Pro 44.5
• Alternative Valuation Buy Below 37.5

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Analysts Recommendations
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Risk

• Risk vs. Volatility

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Risk to HD

• Higher interest rates reduce home improvement
  projects
• Suppliers raise prices - increased costs
• Over-expansion -growth is too rapid
• Growth into emerging markets doesnt work
• Relatively low profit margin - any economic
  slowdown could hurt earnings (unlikely)

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Why Home Depotfor SMIP

• Leader in the Industry
• Twice the size of Lowes
• Almost all ratios are better than Lowes
• High ROE and ROA
• Growth stock selling at a discount
• HD plans to open 200 new stores per year
• Moving into both Mexico and Canada (Lowes isnt
  expected to move internationally for three years)
• Price to Earnings near all-time low

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Why HD For SMIP Continued

• Management appears to be rational
• Low dividends due to ability to reinvest
  shareholders money at higher rates than
  shareholders can achieve
• Consistent Operating History
• Superior Growth rates
• Favorable long-term perspective
• Growing investments into homes
• We understand how the company works

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Recommendation

• Shares to Buy 200
• Buy Price 37.5
• Set 15 floor 31.88
• Set Ceiling P/E ratio of 60 or above
• Dont buy until price drops below target buy
  price after election