Value Line Publishing Part 1
Value Line Publishing
Problems:
The case highlights the performance review and financial-statement forecasting decisions of a Value Line analyst for retail building-supply industry in Oct 2002. The industry is dominated by two firms: Home Depot, with strong operating performance and Lowe’s, with strong stock-market performance. The industry is highly consolidated with two major players, high barriers to entry and with the independent hardware stores struggling to remain competitive. This is also reflected in Exhibit 1, Home Depot’s and Lowe’s market shares were 22.9% and 10.8% respectively. Even though it is expected that in the longer run both the firms would benefit from the additional market share freed up due to consolidation, however this trend poses the problem of a healthy competition in the retail building-supply industry whereby numerous firms compete with each other and there are few barriers to entry and exit. Moreover, since these two firms capture one third of the total industry sales, the investment community is highly concerned about the consequent price war which would lead to even more aggressive pricing and promotional strategies. Yet, Home Depot is experiencing diminishing returns from promotional efforts. The head-to-head competition and price war is another factor that distorts the perfect competition within the industry and will not favor the investors . Another problem is the low interest rates in 2002 and the strong housing market which seems beneficial for the retail building-supply industry, however this situation would not last for long. The interest rates would start to rise and reach the equilibrium, and the housing market would collapse (reference: financial crisis 2008-09) and the industry as a whole and the major players might have to experience significant losses. Also, since both the firms were under-going rapid domestic expansion, their operating costs as well as selling and administrative costs were increasing alongside. In
Problems:
The case highlights the performance review and financial-statement forecasting decisions of a Value Line analyst for retail building-supply industry in Oct 2002. The industry is dominated by two firms: Home Depot, with strong operating performance and Lowe’s, with strong stock-market performance. The industry is highly consolidated with two major players, high barriers to entry and with the independent hardware stores struggling to remain competitive. This is also reflected in Exhibit 1, Home Depot’s and Lowe’s market shares were 22.9% and 10.8% respectively. Even though it is expected that in the longer run both the firms would benefit from the additional market share freed up due to consolidation, however this trend poses the problem of a healthy competition in the retail building-supply industry whereby numerous firms compete with each other and there are few barriers to entry and exit. Moreover, since these two firms capture one third of the total industry sales, the investment community is highly concerned about the consequent price war which would lead to even more aggressive pricing and promotional strategies. Yet, Home Depot is experiencing diminishing returns from promotional efforts. The head-to-head competition and price war is another factor that distorts the perfect competition within the industry and will not favor the investors . Another problem is the low interest rates in 2002 and the strong housing market which seems beneficial for the retail building-supply industry, however this situation would not last for long. The interest rates would start to rise and reach the equilibrium, and the housing market would collapse (reference: financial crisis 2008-09) and the industry as a whole and the major players might have to experience significant losses. Also, since both the firms were under-going rapid domestic expansion, their operating costs as well as selling and administrative costs were increasing alongside. In