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Tuesday, August 15, 2006

Summing Up Wal-Mart and Home Depot

This morning we got to see two key reports from key DJIA components Wal-Mart (WMT) and Home Depot (HD).

Before going into the poorly discussed reports from the media and before calling an end to the dominance of each behemoth, these both were not horrific. We aren't trying to say they were great, but if you account for forward multiples it is ok and this is now setting the bar very low for future quarters and 2007. The forward guidance is soft, but based on how these shares have been lagging in recent weeks and months, it looks like the street didn't adequately lower the guidance ahead of the company reports. it is obvious we are going into the lower-end of the economic cycle in an growth phase, and the street should have had their estimates lower already.

Wal-Mart (WMT) is down 2% in pre-market trading, on what is really its first earnings decline in a decade. The company's net EPS fell 26% becasuse of losses in German operations discontinued. EPS was $0.50, but outside of the charges it was $0.72 EPS and that is in-line with street estimates. The company did confirm higher gas prices are affecting buying and shopping habits. They did post higher growth internationally and US same-store-sales were +1.7%, broken down as 1.5% at Wal-Mart and 2.6% at Sam's Club. The annual EPS guidance is set at $2.88 to $2.95 versus estimates of $2.92 on the street. For a behemoth suffering along with the rest of the street and already toward the lower-end of the 52-week trading range, this just doesn't seem all that bad. If they fired all the old greeters at the front of the store, they could probably add to the bottom line.

Home Depot (HD) is trading up about 1.5% pre-market after its earnings. It goes without saying that the street was not expecting a huge quarter. The company is stuck in the middle of a slowing housing market and from the same economic slowing affecting other retailers. It is also investing $350 million back into improving its existing stores. EPS was $0.93, a apenny above the $0.92 estimates. The company put EPS at the lower-end of the range for 2006, but that is actually a success considering how bad the home market is and considering the projected slowing of the economy. The company will also begin showing same-store-sales again to appease analysts and the street. unfortunately its same-store-sales for the quarter were -0.2%, but this may even be considered a near success by the street.

So neither one of these reports were just bang out numbers, but they didn't portray a situation of the two DJIA components going to hell in a handbasket. That may at least stop some of the carnage in the shares, and the street will have to be happy with that for now. If nothing else, the bar has been set pretty low for both behemoths.

Jon C. Ogg
August 15, 2006

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