Andrew S. Wyatt
FIN 311 MWF 11:00-11:50am
Part 1 of Project
The company I chose to do my research project on is Home Depot, Inc. I chose
Home Depot, Inc. because they are one of the largest suppliers of home improvement
supplies, building materials, lawn and garden supplies, and various installation services in
North America. What Home Depot, Inc. provides seemed especially crucial to me
considering the circumstances in New Orleans, and the amount of rebuilding that will
have to be done in the area of Louisiana.
Home Depot stores stock approximately 40,000 to 50,000 products a year. These
products include lumber and building supplies, electrical, plumbing, kitchen, hardware,
flooring, paint, and wall coverings. Basically, Home Depot carries anything related to
housing and ways to build, or improve a home. In addition, Home Depot, Inc. also
provides installation services for almost every product they sell. The plumbing,
electrical, and kitchen group was the leader in revenue for the fiscal year 2005 with 29%.
This was followed closely by hardware and seasonal with 27.6%. Third in revenue were
lumber and building supplies with 24.4% and last were paint, flooring, and wall
coverings with 19.7%.
As currently as January 30, 2005, Home Depot, Inc. 1,890 stores throughout the
U.S., Canada, and Mexico. Most of these stores were Home Depot or Expo Design
Center stores. These stores average approximately 100,000 square feet in total floor
space. In addition, Home Depot, Inc. has opened stores to accommodate professional
customers; Home Depot Supply and Home Depot Landscape Supply. Home Depot, Inc.
is based in Atlanta, Georgia.
Home Depot, Inc. current strategy for growth: enhancing the core, expanding the
market, and extending the business, according to Management’s discussion. To back
their strategy they invested $3.9 billion back into their business and $727 million for
acquisitions of new businesses during the fiscal year of 2004. Home Depot, Inc. invested
in technology to increase the modernization of stores and make it more streamlined for
customers. They expanded their business by opening new stores all over North America
and offering a wide variety of installation programs, currently 23. They expanded the
market by capturing a growing share of the professional residential, heavy construction,
and commercial markets.
Some goals for Home Depot, Inc. include opening 175 new stores by the fiscal
year ending January 29, 2006 and an increase in sales growth of 9% to 12%. Other goals
of Home Depot, Inc. have been implementation or expansion of a number of in-store
initiatives. These initiatives include the Pro initiative, the Appliance initiative, and
Designplace initiative.
Home Depot’s strengths continue to be its willingness to improve its position in
the home improvement market. Its strong plan of investing in itself to improve current
stores and build new ones in growing markets allow Home Depot, Inc. to position itself
to dominate the market. Uncertainty of lumber prices and other commodities in the
market produce a sense of ambiguity when trying to predict future sales and growth in the
market. Inflation and deflation are also perceived threats. An important opportunity for
Home Depot is to gain more market share in the U.S. from competitors, such as Lowe’s.
Andrew S. Wyatt
Project Part II
October 5th, 2005
A. For the latest full year (2004), calculate the following ratios for your company.
*Money is given in Millions
(a) Current Ratio: Current Assets / Current Liabilities  13,328/9,554 = 1.39502
(b) Quick Ratio: (CA-Inventory)/ CL  13,328-9,076/9,554 = 0.445049
(c) Times interest earned ratio: EBIT / Interest  6,843/112 = 61.0982
(d) Total Debt/ Equity: (TA-TE)/TA  (34,437-22,407)/34,437 = 0.349334
Debt/Equity: TD/TE  12,030/22407= 0.536886
(e) Inv. T/O Ratio: COGS/Inventory  43,160/9,076 = 4.7554
(f) Avg. Collection Period: Sales/A/R64816/1097 = 59.0848
Days’ Sales in Receivables: 365/59.0848 = 6.17756
(g) Total Asset Turnover: Sales / TA  64,816/ 34,437 = 1.88216
(h) ROA: NI/Total Assets  4,304/34,437 = .124982 or 12.4982%
(i) ROE DuPont: PM * TAT * EM  .066403 * 1.88216 * 2.53689 = .317063
or 31.7063%
(j) P/E Ratio: Price Per share/ Earnings per share  38.55/ 1.88 = 20.5053
B. Download the financial ratios for the 6 years provided in “Excel Analytics.”
(a) The current ratio for Home Depot, Inc. has steadily declined since 2001. This
decline seems to be very small and is not much cause for concern considering
the ratio is still well above 1. Also, the working capital per share and cash
flow per share has increased every year since 2001. Overall Home Depot
liquidity has maintained its level over the years since the current and quick
ratios have declined while the other ratios have increased.
(b) After reviewing the “leverage” ratios for Home Depot, Inc. the company has
shown no improvement in the financial leverage department. Even though the
company has not actually improved, I do not believe there is reason for
concern because after coming down, they appear to be going back up.
(c) The “efficiency” ratios for Home Depot show an overall slight decline from
2001 and up to date as of 2005. As Home Depot has grown in size over the
years, their overall utilization of resources has slightly declined.
(d) The “profitability” ratios are actually improving. The numbers for Home
Depot are up all across the board and have shown improvement from year to
year.
Regarding Home Depot, Inc. and their overall financial strength, I am optimistic.
The “profitability” ratios are a great reason to be optimistic. They continue to
improve and show signs of how profitable Home Depot, Inc. can be. While some
of the other ratios may not show these kinds of improvement they are little cause
for concern.
C. Obtain Ratios for your company and industry.
Valuation Ratios
a. P/E ratio & spread
b. Price to book
c. Price to free cash flow
Profitability ratios
a. Gross profit margin
b. Operating profit margin
c. Net profit margin
Management effectiveness ratios
a. Return on assets
b. Return on equity
Efficiency ratios
a. Receivables turnover
b. Inventory turnover
c. Asset turnover
Home Depot, Inc.
15.45, High-47.44, Low-13.36
3.25
77.84
Industry
17.54, High-46.94, Low-13.06
3.51
73.12
33.52
11.14
6.99
34.03
10.57
6.69
13.33
22.52
12.4
22.26
42.62
4.85
1.91
39.38
4.65
1.87
Based on the comparison from Reuters and the available ratios, it appears that
Home Depot, Inc. is on pace or ahead of the industry in most categories. This shows that
Home Depot is strong within its own industry. Even though, they are slightly behind in
the current P/E ratio and Price to Book ratio they show up well in other categories,
especially within the profitability ratios. Their operating and net profit margins are ahead
of the industry averages. They are also strong in the management effectiveness ratios, in
which they are ahead of the industry in both categories.
As of now, I would recommend to buy this stock. The prices are low and Home
Depot, Inc. will rebound as numbers have shown. They are also strong within their own
industry, which is a good sign. I believe their numbers are not as strong as they have
been because this appears to be a slow time for this industry.
Andrew S. Wyatt
000767324
Project Part 3
G = [2.3 + 8.1 + 6.2 + 11.7 + 29.5 + .1 – 10 + 14.3 – 4.9 + 5.4 + 10.3 + 12.5 + 3.8 + 11 +
11.5 + 2.1 + 5.2 + 4.8 + 11.1 + 13.8] / 20
G = 7.4% or 0.074
R = 10.21% or .1021
Price = [D0 (1+G)]/(R-G)  Using the Dividend & Yield from Yahoo Finance of .40
[.40 (1+.074)]/(.1021-.074)
.4296/.0281
15.2883
Price = [D0 (1+G0]/(R-G)  Using the EPS from Yahoo Finance of 2.58
2.58(1.074)/.0281
98.6093
Using the P/E multiple average:
(12.5 + 15.8 + 14.1 + 9.0 + 10.7 + 13.4 + 31.8 + 19.7 + 17.7 + 14.2 +13.1 + 15.2 + 17.7 +
21.8 + 21.8 + 21.5 + 24.7 + 20.0 + 17.2 + 16.8)/20
P/E Multiple Average = 17.435
Price = EPS*P/E ratio
Price = 2.58* 17.435
Price = 44.9823
Beta = 1.21
R = Rf + B (Rm-Rf)
4.65 + 1.20 (26.4 – 4.65)
R = 30.75%
Price = [.40 (1 + .074)] / (.3075 - .074)  Using the Dividend & Yield from Yahoo
Finance of .40
Price = 1.83983
Price = [2.58 (1 + .074)] / (.3075 - .074)  Using the EPS from Yahoo Finance of 2.58
Price= 11.8669
According to Reuters, Home Depot’s stock last traded at a price of 41.22, which
was down .30 or -.72% from the previous day. Based on my calculations I do not believe
I would purchase this stock. All of my price calculations except the earnings per share
times the P/E ratio and the earnings per share in place of the dividend resulted in a lower
price than what Home Depot is actually trading at.
Based on all my analysis I do not believe I would invest in Home Depot currently.
I do think Home Depot is a steady earner without too much risk involved, but I think the
stock price is a little too expensive currently. If the price were to continue to drop, then a
later point I believe Home Depot would be a good investment. As of now though, Home
Depot’s stock is priced too high based on my calculations. In several months when the
stores in the south, around Louisiana mainly, have had a chance to be repaired from flood
damage and customers can once again use them might be a good time to invest. I expect
the price to continue to drop until this occurs though. When the price reaches its lowest
point, I believe it would be a good time to invest in Home Depot then.