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Monday, August 07, 2006

Home Depot Goes To The Dump

Stocks: (HD)(LOW)

Home Depot Goes To The Dump

Forbes recently reported that an analyst at UBS Investment Research said that Home Depot was in for rough times because of the slowing housing market. The UBS price target was dropped from $43 to $37. The stock currently trades below $35 and has shown no sign of moving up.

The Associated Press recently quoted a senior retail consultant at Accenture who believes that Home Depot can no longer grow by putting the small mom-and-pop home improvement stores out of business and taking their customers, This means the two home improvement giants, Home Depot and Lowes, will have to battle one another for share. It sounds just awful.

Home Depot’s stock price certainly reflects the market’s pessimism. It now changes hands at under $35, down from a 52-week high of $43.95. The company’s price-to-sales ratio is .85. Even Lowes trades at one time sales

Home Depot has compounded its problems by being nasty to shareholders. The company’s CEO got his board to pay him tons of money. The company will not give out same-store sales historical data any more. But, a cry baby attitude is not going to help the company’s picture get any brighter.

Home Depot has done some smart things. It is diversifying its store base into countries like Mexico, ala Wal-Mart, and planning to help offset any slowing in the US market with sales in foreign companies. The company also has a yield of almost 2%, which appears very safe given the company’s earnings and cash position. The company is also adding new stores in underserved markets.

It is easy to forget that Home Depot is an $80 billion plus business. In the quarter ending April 30, revenue was $21.46 billion. Operating income was $2.42 billion.

Home Depot’s stock traded over $40 in late 2004. At that point, the company’s revenue was at a run rate of about $70 billion and operating income was running about 15% below where it is now.

So, why is Home Depot only a $35 stock? Maybe that is a tad too low.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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