EM-TRADE 2 - Spring 2004

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EM-Trade | Agenda
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Interviews
Poker Tournament
Fantasy Stock Market
Home Depot Analysis – Presentation
Mark Your Calendar
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April 15th: Applications Due (LL “IWantToHelp”); Sign-up
deadline for Fantasy Stock Market Game
April 26th: Poker Tournament (Winship Ballroom)
Early September: Next Meeting
Home Depot | Description
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The Home Depot owns and operates 1,471 do-ityourself warehouse retail stores offering building
materials, home improvement products and related
furnishings.
For the FY ended 1/30/05, revenues rose 13% to
$73.09B. Net income rose 16% to $5B.
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Revenues reflect increased sales due to the opening of
new stores.
Net income also reflect improved gross profit margins due
to lower cost of merchandise sold as a percentage of
revenue.
Home Depot | Current Ratio
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Definition: Current Assets / Current Liabilities
 Current is short-term
 Current Assets: Money, Inventory
 Current Liabilities: Short-term debts
 Debts are IOUs
General idea: A company is generally considered
financially healthy when current assets are equal or
higher than current liabilities.
What to look for: Current Assets > Current Liabilities
 Home Depot’s Balance Sheet [Diagram]
Recommendation: A current ratio of 2. Good (1.395)
Home Depot | Debt/Equity Ratio
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Definition: Long-Term Debt / Equity
 Long-Term Debt
 Equity: Total assets – Total Liabilities
General idea: A higher debt/equity ratio generally means
that a company has been aggressive in financing its
growth with debt.
What to look for: A low Debt/Equity Ratio. The lower the
ratio, the better.
 Home Depot’s Balance Sheet [Diagram]
 Home Depot: Long term debt / Equity = Ratio
Year 2004
856,000
/ 22,407 = 0.038
Recommendation: Ratio of 0.1. Great (0.038)
Home Depot | P/E Ratio
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Definition: Price / Earning
 The price of the stock / the year earnings of a
company.
 Earnings: Earning in EPS (Earnings per share)
General Idea: The higher the P/E ratio, the higher the
speculation of the company’s future earning performance
What to look for: Depends. Optimistic: High P/E ratio.
Conservative: Low P/E ratio
 Home’s Depot Income Statement - Look at EPS
 Home Depot’s Quote
 Ratio: 17.09
Recommendation: P/E ratio of 15. Great (17.09)
Home Depot | Growth Rates
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Definition: The compounded annualized rate of growth of
a profit, earnings, revenues, etc.
 Relative measurement (percentage):
 (This year’s profit – Last year’s profit) / (Last year’s
profit)
General Idea: Higher the growth rate, higher the risk.
 Want to look for growth.
What to look for: Depends. Risk taker vs. Risk averse
 Home’s Depot Income Statement
 Revenue Growth: (64,816.0 - 58,247.0) / (58,247. 0 )
= 11%
Recommendation: 10 to 15% growth rates. Great (11%)
Home Depot | Earnings
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Earnings: The net income of a company during a specific period. Generally, but not necessarily,
referring to after-tax income.
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Earnings are perhaps the single most studied number in a company's financial statements. They show how
profitable a company is.
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Guidance has a role in the market because it
provides information that can be used by investors to
analyze the company, evaluate management, and
create forecasts.
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Earnings Estimate: An analyst's estimate for a
company's future quarterly or annual earnings.
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Analysts use forecasting models, management
guidance, and fundamental information on the company
in order to derive an estimate.
Earnings Surprise: When the earnings reported in
a company's quarterly or annual report are above or
below analysts' earnings estimates.
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Companies are foolish if they think that they can alter the
market's short-term focus.
The Street will still do what it wants, and it will stay
focused on quarterly timelines.
If, however, more companies opt for no guidance, the
Street may inadvertently become more rational and stop
whipsawing stock prices for miniscule variances.
When a positive earnings surprise occurs, share price
will usually increase. A negative earnings surprise will
usually result in a decline in share price.
Earnings Growth Rate: indicators that reflect the
opinions of industry analysts as to the growth
potential of a company's earnings.
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The data is supplied by an outside service.
Home Depot | Insider Trading
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Insider Trading: The buying or selling of a security by someone who has access to material, nonpublic information
about the security.
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Insider trading can be illegal or legal depending on when the insider makes the trade:
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Illegal when the material information is still nonpublic. Trading while having special knowledge is unfair to other
investors who don't have access to such knowledge.
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Includes: tipping others when you have any sort of nonpublic information. Directors are not the only ones who have the potential
to be convicted of insider trading. People such as brokers and even family members can be guilty.
Legal once the material information has been made public, at which time the insider has no direct advantage over
other investors.
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The SEC, however, still requires all insiders to report all their transactions.
Insider Trading (Prev. 6 months)
Net Insider Trades
-6.00
% Shares Owned
# Buy Transactions
1.00
# of Institutions
# Sell Transactions
7.00
Total Shares Held (Mil)
Net Shares Purchased (Mil)
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Institutional Ownership
-0.251
63.682
2,436.00
1,398.434
3 Mo. Net Purchases (Mil)
114.851
160.765
# Shares Purchased (Mil)
0.005
3 Mo. Shares Purchased (Mil)
# Shares Sold (Mil)
0.256
3 Mo. Shares Sold (Mil)
45.913
An executive, director or major shareholder sold a small number of shares recently. (Neutral)
Shares are neither being accumulated heavily nor sold heavily by financial institutions. (Neutral for a large company)
Competitive Factors
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Price
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Store location
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Customer service
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Depth of merchandise
Home Depot vs. Lowe’s
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55% of Lowe’s are within 5 miles of HD
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HD commonly faces decline up to 15% when
Lowe’s enters nearby
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Industry saturated in 4 years?
Home Depot | Chart Analysis
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Price
Volume
Moving Averages
MACD
RSI
Stochastic
Price
Volume
The number of trades in a security over a period
of time.
Volume
Volume
Volume
Moving Averages (MA)
An average of data for a certain number of time periods.
MACD (Moving Average
Convergence/Divergence)
-Displays trend following characteristics
-Compares moving averages
RSI (Relative Strength Index)
- Compares overbought (>70) and oversold (<30)
Stochastic Oscillator
- A momentum indicator that measures the price relative
to the high/low range over a set period of time.
Thank You!
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