Home Depot
Offers Attractive Fixer-Upper
By Richard Moroney, editor
Dow Theory Forecasts
One
of the more remarkable aspects of the market's 30-month decline
is the degree by which even consensus blue chips have been pummeled.
A good example is Home Depot (NYSE HD $29), down nearly
59% from its 2000 high of $70. That's a loss of nearly $100
billion in market capitalization. And that implosion in market
cap occurred during a time when Home Depot's quarterly profits
were rising.
To be sure, growth
has slowed for the firm, and herein lies the rub. Home Depot
commanded price/earnings ratios in the 30s and 40s a few years
ago when it was perceived as a growth stock. But Home Depot no
longer carries the cachet that it once did with investors, and
the stock's pedestrian price/earnings ratio of just 16 times
fiscal 2004 (ending in January) earnings reflects its declining
sex appeal on Wall Street. Of course, what should matter to investors
is the future, not the past, which leads to the obvious question
Is Home Depot a fixer-upper worth buying, or a money pit? The
Forecasts sides more with the former opinion but acknowledges
that a sustained upward move in the stock price could be a couple
of quarters away. Still, patient investors with two- to four-year
time horizons may gradually purchase these shares, upgraded last
week to Long-Term Buy.
Slowdown In Growth
At
first blush, Home Depot's top-line growth appears to be in relatively
good shape. Revenue in the July quarter, for example, rose a
seemingly healthy 12% to $16.3 billion. The acid test for retailers,
however, is not total sales, but same-store sales (that is, sales
from stores in existence for at least one year). Home Depot's
modest 1% same-store sales growth in the quarter did not exactly
endear the stock to Wall Street, especially when chief competitor
Lowe's was posting same-store sales growth of nearly 7% over
the same period.
Home Depot is taking
a number of measures to address its problems. The company is
in the midst of a "very aggressive refreshening plan,"
according to CEO Robert Nardelli, including store upgrades and
new inventory. Such moves, however, probably will not do much
to boost revenue growth in the next quarter or two. Store makeovers
and inventory additions can disrupt customer traffic in the short
run. Also, Home Depot will likely feel some of the headwinds
of a slowdown in the general retailing climate.
Fortunately, lots of
bearishness is already baked into Home Depot's current stock
price, so it should not take much in the way of good news to
rejuvenate investor interest. Just how cheap is Home Depot stock
relative to historical levels?
The stock has not traded
at such a modest price/earnings multiple in more than a decade.
The stock price has
not seen such low levels since 1998, when per-share earnings
were less than half of what they are today.
Conclusion
While
Wall Street seems to have its doubts about Home Depot, the company
is bullish on its future. The firm is in the midst of a $2 billion
share-buyback program. In August it reaffirmed its guidance of
15% to 18% annualized sales growth and 18% to 20% annualized
profit growth over the next three years. An annual report for
Home Depot Inc. may be obtained at 2455 Paces Ferry Road NW,
Atlanta, GA 30339; (770) 433-8211.
Editor's Note: Richard
Moroney is editor of Dow Theory Forecasts, 7412 Calumet Ave.,
Hammond, IN 46324. 1 year, 52 issues, $259. Visit the web site
at www.dowtheory.com.
