Value Line Publishing, October 2002
Gracie Quintana Jeff Miller Christine Kyrish Steven Poon
December 6, 2004
Table of Contents
Financial Data Snapshot I. Overview of Valuation II. Business Summary Products and Services Competitors Industry Analysis Competitive Strategy III. Accounting Analysis Accounting Policies Degree of Accounting Flexibility Accounting Strategy Quality of Disclosure Quantitative Analysis Red Flags IV. Ratio Analysis and Forecasts Ratio Analysis Section Financial Statement Forecasting Methodology Conclusion V. Valuation Cost of Capital Method of Comparables
1 1 4 4 6 9 15 16 16 19 20 23 23 24 26 27 29 33 34 35 36
Discounted Dividends Discounted Free Cash Flows Discounted Residual Income Long Run Average Residual Income Abnormal Earnings Growth Altman’s Z-score Results VI. Analyst Recommendation VII. References VIII. Appendix Industry Graphs Ratio Analysis Competitor Annual Financials Quarterly Financials and Forecasts Annual Financials and Forecasts Calculations used in Valuations Method of Comparables Valuation Discounted Free Cash Flow and Sensitivity Analysis Valuation Discounted Dividends and Sensitivity Analysis Valuation Residual Income and Sensitivity Analysis Valuation Abnormal Earnings Growth and Sensitivity Analysis Valuation
37 38 39 39 40 41 41 42 43 44 44 45 47 49 52 55 56 57 58 59 60
Investment recommendation: Home Depot is slightly overvalued therefore we recommend it as a hold. The stock is poised to perform at least as well as the market.
Home Depot is expected to penetrate foreign markets; this growth opportunity will increase market share and the bottom line. Uncertainty in the economy affects Home Depot’s sales, as it operates in a cyclical industry. This uncertainty will not have a detrimental impact on the long term growth of Home Depot and its subsidiaries.
I. Overview of Valuation Company and Industry Overview The Home Depot, Inc. is the world’s largest home improvement retailer and