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Wednesday, August 23, 2006

Home Depot Looks For A Bottom As Housing Falters

Stocks: (HD)

Shares in Home Depot traded pretty close to their 52-week low today. It is closer to a three year low, but who is counting. Bob Nardelli became HD's Chairman at the beginning of 2002 when the stock was at $50, and things have not been the same since. The stock now trades at $33.70. Looking back five years, an investor would have done much better to just put money into an S&P index fund.

Existing home sales dropped to a two-year low today and inventories of new homes are at an all-time high. New home construction is not exactly having a good year either. All that goes to say that the entire drop in Home Depot's stock cannot be blamed on management.

In the April 30 quarter, HD has revenue of $21.5 billion. Operating income was $2.4 billion. There was little topline growth in the four quarters before the July 30 period, but, in that most recent quarter revenue did grow 17% to $26 billion. Based on guidance, that may be nearing the high-water mark.

Over the last two fiscal years, Home Depot's revenue has grown at about 12% year-over-year so the rise in sales recently could be viewed as good news, but no one believes that the road ahead will be smooth.

Interest rates and home sales are likely to keep Home Depot's stock below $35. With no end in sight for the economic problems crippling the company, there is little reason for the shares to recover.

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

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