The Home Depot, Inc. Stock Report
March 19, 2005
NYSE Symbol:HD
Recommendation:  12-Month Target Price: $48.00
(as of November 16, 2004)
Sector: Consumer Discretionary
Sub-Industry: Home Improvement Retail
Peer Group: Retail (Building Supplies)
HD has an approximate 0.77% weighting in the S&P 500
Summary:HD operates a chain of more than 1,800 retail warehouse-type stores, selling a wide variety of home improvement products for the do-it-yourself and home remodeling markets.
Price as of 03/18/05:  $38.88 2006E S&P Core EPS: $2.53
GAAP Earnings vs. Previous Year
Up Down No Change
Analyst commentary prepared by Michael Souers/MF/JWP
Highlights March 01, 2005
  • We expect sales to grow 9% to 11% in FY 06 (Jan.), driven by about 170 to 190 new store additions, including international store openings, selected acquisitions, and same-store sales gains in the low to mid-single digits. We see same-store sales growth likely to be aided by continued penetration of appliance programs, new product launches in the fast growing lawn and garden category, an expanding installation business, improvements in the merchandise mix and customer service, and higher marketing spending.
  • We see FY 06 margins widening slightly, benefiting from a greater proportion of sales mix of higher margin private label brands and more upscale merchandise, from firmer pricing, and from economies of scale. However, expected increases in compensation, marketing, healthcare and insurance costs will likely temper margin expansion.
  • After higher interest expense caused by increased debt levels, and a level effective tax rate of 36.8%, we project FY 06 EPS of $2.58, a 14% increase from the $2.26 earned in FY 05. Our FY 06 S&P Core EPS estimate of $2.53 reflects projected stock option expense.
Investment Rationale/Risk March 01, 2005
  • Our recommendation is buy. We think that recent and likely additional acquisitions in the fast growing do-it-for-me segment should help maintain positive earnings momentum. We also see high consumer interest in home makeovers, healthy economic trends, and improved merchandise and customer service as positive for the stock. Recent positive remarks regarding the new urban store format give us confidence that HD can capture some of the largely untapped urban markets. In addition, we see growth prospects in Canada, Mexico and China fueling the company's international expansion plans. We believe these markets will yield positive results for many years to come. At 16X our FY 06 EPS estimate, the shares trade in line with the level of the S&P 500, and slightly below key peer Lowe's (LOW: buy, $59).
  • Risks to our recommendation and target price include a potential slowdown in the economy; a faster than expected rise in interest rates, restricting home improvement related spending; increasing competition from LOW; and unfavorable currency movements.
  • Our 12-month target price of $48 is equal to 19X our FY 06 EPS estimate, and is derived from our DCF model, which assumes a weighted average cost of capital of 10.2% and a terminal growth rate of 3.5%.
Quantitative Evaluations 
S&P Earnings & Dividend Rank: A+
D C B- B B+ A- A A+
S&P Fair Value Rank: 5+
1 2 3 4 5
Lowest Highest
Fair Value Calc: $51.00  (Undervalued)
S&P Investability Quotient Percentile
1 Lowest Highest 100
HD scored higher than 99% of all companies for which an S&P Report is available.
Volatility: Low
Low Average High
Technical Evaluation: BEARISH
Since February, 2005, the technical indicators for HD have been BEARISH.
Relative Strength Rank: Weak
1 Lowest Highest 99
Key Stock Statistics
S&P Oper. EPS
P/E on S&P Oper.
EPS 2006E
S&P Oper. EPS
Yield 1.0%
Dividend Rate/Share 0.40
52-week Range $44.30-$32.34
12 Month P/E 17.2
Beta 1.28
Shareholders 204,032
Market Cap (B) $ 85.4
Shares Outstanding (M) 2196.0

Value of $10,000 invested five years ago: $ 7,610

Dividend Data
(Dividend have been paid since 1987)
Stock of
0.085 May. 26 Jun. 08 Jun. 10 Jun. 24 '04
0.085 Aug. 06 Aug. 31 Sep. 02 Sep. 16 '04
0.085 Nov. 18 Nov. 30 Dec. 02 Dec. 16 '04
0.100 Feb. 24 Mar. 08 Mar. 10 Mar. 24 '05
Revenues/Earnings Data
Fiscal year ending January 31
Revenues (Million $)
  2005 2004 2003 2002 2001 2000
1Q 17,550 15,104 14,282 12,200 11,112 8,952
2Q 19,960 17,989 16,277 14,576 12,618 10,431
3Q 18,772 16,598 14,475 13,289 11,545 9,877
4Q 16,812 15,125 13,213 13,488 10,463 9,174
Yr. 73,094 64,816 58,247 53,553 45,738 38,434

Earnings per Share ($)
  2005 2004 2003 2002 2001 2000
1Q 0.49 0.39 0.36 0.27 0.27 0.21
2Q 0.70 0.56 0.50 0.39 0.36 0.29
3Q 0.60 0.50 0.40 0.33 0.28 0.25
4Q 0.47 0.42 0.30 0.30 0.20 0.25
Yr. 2.26 1.88 1.56 1.25 1.10 1.00

Next earnings report expected: mid-May. Source: S&P, Company Reports. EPS Estimates based on S&P Operating Earnings; historical GAAP earnings are as reported.
Business Summary  March 01, 2005

With revenues exceeding $72 billion, Home Depot, founded in 1978, is the world's largest home improvement retailer, and the second largest U.S. retailer. The company mainly operates retail warehouse-type stores that sell a wide assortment of building materials and home improvement and lawn and garden products, primarily to the do-it-yourself and home remodeling markets. At July 31, 2004, HD operated 1,788 stores, including 1,716 Home Depot stores (105 in Canada and 42 in Mexico), 54 EXPO Design Centers, five Home Depot Supply stores, 11 Home Depot Landscape Supply stores, and two Home Depot Floor stores.

Home Depot stores average 107,000 sq. ft., plus 22,000 sq. ft. of garden center and storage space. They stock 40,000 to 50,000 items, including brand name and proprietary items. HD aims to provide a broad range of merchandise, consisting of many different kinds of building and home improvement materials, at competitive prices. The company trains employees to be knowledgeable about the products in the stores; employees may also have trade skills or direct experience in using the products. HD also offers installation services for do-it-for-me customers, typically homeowners who purchase materials themselves and hire third parties to complete the project and/or installation. In FY 04, the company acquired Installed Products U.S.A., a roofing and fencing installed services business; and RMA Home Services, a replacement windows and siding installed services business.

Home Depot Landscape Supply stores are designed to extend the reach of Home Depot's garden departments, by focusing on professional landscapers and avid do-it-yourself garden enthusiasts.

EXPO Design Centers, which average about 100,000 sq. ft., sell more upscale products and services primarily for home decorating and remodeling projects. Unlike Home Depot stores, they do not sell building materials and lumber.

In late FY 04, under The Home Depot Supply brand, the company combined three wholesale businesses: Maintenance Warehouse, a distributor of maintenance, repair and operations supplies to the multi-family housing, hospitality and lodging industries; Apex Supply Company, a distributor of plumbing, HVAC, appliances and other related products primarily to trade and mechanical contractors; and HD Builder Solutions Group, which provides professional homebuilders with flooring, countertops and window treatments. HD's e-commerce site,, sells about 10,000 products over the Internet. In FY 04, the site was enhanced to allow customers to sign up for in-home consultations for HD's installation services.

During FY 05, HD acquired White Cap Construction Supply, Inc., which now operates 74 Pro distribution branches across the U.S. The company also purchased 20 Home Mart stores in Mexico, bringing the total to 42.

Company Financials Fiscal year ending January 31
Per Share Data ($)
(Year Ended January 31)
2005 2004 2003 2002 2001 2000 1999 1998 1997 1996
Tangible Book Value NA 9.56 8.39 7.53 6.32 5.22 3.83 3.17 2.71 2.28
Cash Flow NA 2.35 1.95 1.62 1.35 1.19 0.86 0.63 0.53 0.42
Earnings 2.26 1.88 1.56 1.25 1.10 1.00 0.71 0.52 0.43 0.34
S&P Core Earnings NA 1.78 1.46 1.18 1.01 NA NA NA NA NA
Dividends 0.26 0.26 0.21 0.17 0.16 0.13 0.07 0.06 0.05 0.04
Payout Ratio 12% 14% 13% 14% 15% 13% 10% 12% 12% 12%
Calendar Year 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995
Prices:High 44.30 37.89 52.60 53.73 70.00 69.75 41.33 20.16 13.22 11.11
Prices:Low 32.34 20.10 23.01 30.30 34.68 34.58 18.43 10.61 9.22 8.13
P/E Ratio:High 20 20 34 43 64 70 58 39 31 32
P/E Ratio:Low 14 11 15 24 32 35 26 21 21 24
Income Statement Analysis (Million $)
Revenues NA 64,816 58,247 53,553 45,738 38,434 30,219 24,156 19,536 15,470
Operating Income NA 7,922 6,733 5,696 4,792 4,258 3,034 2,299 1,766 1,361
Depreciation NA 1,076 903 764 601 463 373 283 232 181
Interest Expense NA 62.0 37.0 22.0 21.0 28.0 37.0 42.0 39.0 25.0
Pretax Income NA 6,843 5,872 4,957 4,217 3,804 2,654 1,914 1,543 1,195
Effective Tax Rate NA 37.1% 37.6% 38.6% 38.8% 39.0% 39.2% 38.6% 38.7% 38.8%
Net Income NA 4,304 3,664 3,044 2,581 2,320 1,614 1,160 938 732
S&P Core Earnings NA 4,067 3,414 2,780 2,364 NA NA NA NA NA
Balance Sheet & Other Financial Data (Million $)
Cash NA 2,826 2,253 2,546 167 168 62.0 172 558 108
Current Assets NA 13,328 11,917 10,361 7,777 6,390 4,933 4,460 3,709 2,672
Total Assets NA 34,437 30,011 26,394 21,385 17,081 13,465 11,229 9,342 7,354
Current Liabilities NA 9,554 8,035 6,501 4,385 3,656 2,857 2,456 1,842 1,416
Long Term Debt NA 856 1,321 1,250 1,545 750 1,566 1,303 1,247 720
Common Equity NA 22,407 19,802 18,134 15,004 12,341 8,740 7,098 5,955 4,988
Total Capital NA 24,230 21,485 19,573 16,755 13,188 10,400 8,595 7,366 5,822
Capital Expenditures NA 3,508 2,749 3,393 3,558 2,581 2,059 1,525 1,194 1,278
Cash Flow NA 5,380 4,567 3,808 3,182 2,783 1,987 1,443 1,170 913
Current Ratio NA 1.4 1.5 1.6 1.8 1.7 1.7 1.8 2.0 1.9
% Long Term Debt of Capitalization NA 3.5 6.1 6.4 9.2 5.7 15.1 15.2 16.9 16.9
% Net Income of Revenues NA 6.6 6.3 5.7 5.6 6.0 5.3 4.8 4.8 4.7
% Return on Assets NA 13.4 13.0 12.7 13.4 15.2 13.1 11.3 11.2 11.1
% Return on Equity NA 20.4 19.3 18.4 18.9 22.0 20.4 17.8 17.1 17.4
Data as orig reptd.; bef. results of disc opers/spec. items. Per share data adj. for stk. divs. Bold denotes primary EPS - prior periods restated. E-Estimated. NA-Not Available. NM-Not Meaningful. NR-Not Ranked. UR-Under Review.
Office: 2455 Paces Ferry Road, Atlanta, GA 30339-1834.
Telephone: 770-433-8211.
Chrmn, Pres & CEO: R.L. Nardelli
EVP & CFO: C.B. Tome
EVP, Secy & General Counsel: F.L. Fernandez
VP & Investor Contact: D. Dayhoff
Directors: G. D. Brenneman, R. H. Brown, J. L. Clendenin, B. R. Cox, C. X. Gonzalez, M. A. Hart III, B. G. Hill, L. P. Jackson, Jr., L. R. Johnston, K. G. Langone, R. L. Nardelli, R. S. Penske.
Founded: 1978
Domicile: Delaware
Employees: 299,000
S&P Analyst: Michael Souers/MF/JWP

S&P Recommendation - Since January 1, 1987, Standard and Poor's has ranked a universe of common stocks based on a given stock's potential for future performance. Under proprietary STARS (Stock Appreciation Ranking System), S&P equity analysts rank stocks according to their individual forecast of a stock's future capital appreciation potential versus the expected performance of the S&P 500 index (before dividends), based on a 12-month time horizon. STARS was designed to meet the needs of investors looking to put their investment direction in perspective.

STARS Average Annual Performance

S&P 12-Month Target Price - The S&P equity analyst's projection of the market price a given security will command 12 months hence, based on a combination of intrinsic, relative, and private market valuation metrics.

Quantitative Evaluations - In contrast to our qualitative STARS recommendations, which are assigned by S&P analysts, the quantitative evaluations described below are derived from proprietary arithmetic models. These computer-driven evaluations may at times contradict an analyst's qualitative assessment of a stock. One primary reason for this is that different measures are used to determine each. For instance, when designating STARS, S&P analysts assess many factors that cannot be reflected in a model, such as risks and opportunities, management changes, recent competitive shifts, patent expiration, litigation risk, etc.

S&P Earnings & Dividend (Quality) Rank - S&P's appraisals of the growth and stability of earnings and dividends over the past 10 years for individual companies are indicated by the following quality ranks. Quality Rankings are not intended to predict stock movements.

A+ Highest B Lower
A High B- Below Average
A- Above Average C Lowest
B+ Average D In Reorganization
NR Not Ranked  

S&P Fair Value Rank - Using S&P's exclusive
proprietary quantitative model, stocks are ranked in one of five groups, ranging from Group 5, listing the most undervalued stocks, to Group 1, the most overvalued issues. Group 5 stocks are expected to generally outperform all others. A positive (+) or negative (-) Timing Index is placed next to the Fair Value ranking to further aid the selection process. A stock with a (+) added to the Fair Value Rank simply means that this stock has a somewhat better chance to outperform other stock with the same Fair Value Rank. A stock with a (-) has a somewhat lesser chance to outperform other stocks with the same Fair Value Rank. The Fair Value rankings imply the following: 5-Stock is significantly undervalued; 4-Stock is moderately undervalued; 3-Stock is fairly valued; 2-Stock is modestly overvalued; 1-Stock is significantly overvalued.


S&P Fair Value Calc. - The price at which a stock should trade at, according to S&P's proprietary quantitative model that incorporates both actual and estimated variables (as opposed to only actual variables in the case of S&P Earnings & Dividend Rankings). Relying heavily on a company's actual return on equity, the S&P Fair Value model places a value on a security based on placing a formula-derived price-to-book multiple on a company's consensus earnings per share estimate.

Investability Quotient (IQ) - The IQ is a measure of investment desirability. It serves as an indicator of potential medium-to-long term return and as a caution against downside risk. The measure takes into account variables such as technical indicators, earnings estimates, liquidity, financial rations and selected S&P proprietary measures.

Standard & Poor's IQ Rationale:
The Home Depot, Inc.
  Raw Score Max Value
Proprietary S&P Measures 90 115
Technical Indicators 23 40
Liquidity/Volatility Measures 15 20
Quantitative Measures 62 75
IQ Total 190 250

Volatility - Rates the volatility of the stock's price over the past year.

Technical Evaluation - In researching the past market history of prices and trading volume for each company, S&P's computer models apply special technical methods and formulas to identify and project price trends for the stock.

Relative Strength Rank - Shows, on a scale of 1 to 99, how the stock has performed versus all other companies in S&P's universe on a rolling 13-weeks basis.

Global Industry Classification Standard (GICS) - An industry classification standard, developed by Standard and Poor's in collaboration with Morgan Stanley Capital International (MSCI). GICS is currently comprised of 10 Sectors, 24 Industry Groups, 62 Industries, and 132 Sub-industries.

S&P Core Earnings - Standard and Poor's Core Earnings is a uniform methodology for calculating operating earnings, and focuses on a company's after-tax earnings generated from its principal businesses. Included in the definition of its principal businesses. Included in the definition are employee stock option grant expenses, pension costs, restructuring charges from ongoing operations, write downs of depreciable or amortizable operating assets, purchased research and development, M&A related expenses and unrealized gains/losses from hedging activities. Excluded are pension gains, impairment of goodwill charges, gains or losses from asset sales, reversals of prior-year charges and provision from litigation or insurance settlements.

Required Disclosures Other Disclosures

As of December 31, 2004, SPIAS and their research analysts have recommended 26.5% of issuers with buy ratings, 61.3% with hold ratings and 12.2% with sell ratings.

All views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part or analyst compensation was, is, or will be directly or indirectly, related to the specific recommendations or views expressed in this research report.

For purposes of this report, 4 & 5 STARS are BUYS, 1 & 2 STARS are SELLS and 3 STARS are HOLDS. The BUY-HOLD-SELL ranking system used in this report is a consolidated version of our proprietary STARS ranking system defined below:
5-STARS: Total return is expected to outperform the total return of the S&P 500 Index by a wide margin, with shares rising in absolute price.

4-STARS: Total return is expected to outperform the total return of the S&P 500 Index, with shares rising in absolute price.

3-STARS: Total return is expected to closely approximate that of S&P 500 Index, with shares generally rising in price.

2-STARS: Total return is expected to underperform the total return of the S&P 500 Index, and share price is not anticipated to show a gain.

1-STAR: Total return is expected to underperform the total return of the S&P 500 Index, with shares falling in absolute price.

One or more affiliates of SPIAS received non-investment banking compensation from this company during the past 12 months.

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This material is based upon information that we consider to be reliable, but neither SPIAS nor its affiliates warrant its completeness or accuracy, and it should not be relied upon as such. Assumptions, opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results.

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