The Home Depot

By

Mike Sartorius

Presentation Outline

• Past Position• Company Profile• Pertinent News• Financial Statements• Industry Comparison• Stock Comparison: 1 and

3 year• Trend Analysis• Common Size Analysis

• Stock Valuations

• EVA & MVA Model

• Summary of Valuations

• Analysts Recommendation

• Why is this stock for SMIP

• Recommendation

Snapshot• Market Cap: $85,666 million

• What Industry: Retail (Home Improvement)

• What Sector: Services

• Recent Stock Price: $39.25

• 52 Week High: $39.95

• 52 Week Low: $31.93

• Beta: .94

• Ticker Symbol: HD

Past Position

• Number of Shares: 75

• Date Purchased: November 1999

• Date Sold: March 2003

• Buy Price: $54.03

• Sell Price: $22.59

• Approximate Loss: $(2357.94)

Graph of Past Position

Profile• The Home Depot was founded in 1978 in Atlanta, Georgia

and has since become the world's largest home improvement retailer, operating more than 1,700 stores (Home Depot, EXPO, and other subsidiary companies) in the United States, Mexico, and Canada.

• Home Depot stores stock approximately 40,000 to 50,000 different kinds of building materials, home improvement supplies, décor and lawn and garden products that are sold to do-it-yourselfers, home improvement contractors, trades people, and building maintenance professionals.

Profile Continued

• Expo Design Center stores sell products and services

primarily for home decorating and remodeling projects.

• Other subsidiary companies under the Home Depot parent

company, primarily distribute products and sell installation

services to businesses and governments.

• Home Depot’s biggest competitors are Lowes, Sears, and

other small hardware stores.

Pertinent News

• September 21, 2004 - Home Depot Recruiting Military Spouses

– Home Depot, which averages a new store opening every 48 hours, said its effort with the Defense Department also will involve hiring more veterans, active duty service members about to be discharged, National Guard members and reservists.

• October 12, 2004 - Home Improvement Industry Pursues Hispanic Market

– The U.S. home improvement industry is looking to build business with U.S. Hispanics in hopes of cashing in on a market that could be as big as $30 billion.

– Note: Home Depot estimates a $900 billion global home improvement market opportunity.

Pertinent News

• October 10, 2004 - Shares of Home Depot Look Undervalued

– Home Depot accounts for 18 percent of this market, more than twice the amount of Lowe's, which has about 1,000 stores. Analysts polled by Reuters expect Home Depot to post per-share profit of $2.21 in fiscal 2005, which ends in January, and $2.53 in fiscal 2006.

– Home Depot rolled out its first store in Manhattan last month. Chief Executive Robert Nardelli is emphasizing strategic expansion, with hopes to open more than 200 stores per year. He is also emphasizing new higher-end products, improved customer service and more reliance on information technology.

Pertinent News

• September 22, 2004 - Home Depot, Lowe's see strong post-hurricane demand

– "We're 10 weeks after Charley and are still seeing a tremendous amount of rebuilding activity in Southwest Florida, which leads us to believe that we will have a rebuilding phase going on for quite a while throughout the state.”

Financial Statements

• Please Refer to Handout

Industry ComparisonValuation Ratios HD Lowes Sears Industry Sector S&P 500P/E Ratio (TTM) 18.52 19.39 22.3 19.39 27.67 22.57Beta 0.94 1.14 0.56 1.31 0.99 1Price to Sales (TTM) 1.27 1.29 0.25 1.26 2.82 3.19Price to Book (MRQ) 3.81 3.97 1.45 3.89 3.66 4.04Price to Free Cash Flow (TTM) 24.33 135.16 NM 23.71 29.64 25.72% Owned Institutions 62.02 79.61 77.82 64.54 52.11 65.2

Dividends HD Lowes Sears Industry Sector S&P 500Dividend Yield 0.87 0.73 1.06 0.73 2.18 2.08Dividend Yield - 5 Year Avg. 0.5 0.2 2.7 0.47 1.45 1.53Dividend 5 Year Growth Rate 27.65 12.89 0 22.07 1.65 7.38Payout Ratio (TTM) 14.2 5.07 7.82 11.72 15.36 27.38

Growth Rates(%) HD Lowes Sears Industry Sector S&P 500Sales - 5 Yr. Growth Rate 16.49 18.26 0.58 16.37 17.81 9.46EPS (TTM) vs TTM 1 Yr. Ago 27.16 NA 134.99 26.65 14.92 30.32EPS - 5 Yr. Growth Rate 21.64 28.19 34.09 23.04 14.78 12.44Capital Spending - 5 Yr. Growth Rate 11.31 17.79 -5.26 12.69 8.44 4.4

Financial Strength HD Lowes Sears Industry Sector S&P 500Quick Ratio (MRQ) 0.4 0.37 0.4 0.37 0.9 1.31Current Ratio (MRQ) 1.2 1.37 1.42 1.27 1.44 1.8Total Debt to Equity (MRQ) 0.07 0.35 0.98 0.17 0.85 0.81

Industry ComparisonContinued

Profitability Ratios (%) HD Lowes Sears Industry Sector S&P 500Gross Margin (TTM) 32.61 33.07 25.31 33.07 43.54 47.91Gross Margin - 5 Yr. Avg. 30.52 29.25 36.13 30.72 42.63 46.51EBITD Margin (TTM) 12.63 12.54 5.07 12.53 22.38 21.57EBITD - 5 Yr. Avg. 11.2 10.94 9.58 11.08 21.43 20.49Operating Margin (TTM) 10.88 9.59 1.07 10.37 13.56 21.54Operating Margin - 5 Yr. Avg. 9.77 7.92 4.46 9.05 11.55 18.07Pre-Tax Margin (TTM) 10.88 9.59 12.17 10.38 10.83 17.27Pre-Tax Margin - 5 Yr. Avg. 9.8 7.91 6.75 9.06 11.86 17.1Net Profit Margin (TTM) 6.85 5.92 7.7 6.56 8.34 13.91Net Profit Margin - 5 Yr. Avg. 6.06 4.96 4.26 5.62 7.86 11.32

Management Effectiveness (%) HD Lowes Sears Industry Sector S&P 500Return On Assets (TTM) 13.12 12.12 7.65 12.12 6.17 7.1Return On Assets - 5 Yr. Avg. 13.54 8.95 4.37 11.72 5.38 6.6Return On Investment (TTM) 19.09 13.88 16.12 17.26 8.53 10.9Return On Investment - 5 Yr. Avg. 17.73 11.79 7.22 15.43 7.52 10.69Return On Equity (TTM) 21.27 19.84 49.64 21.21 12.88 19.54Return On Equity - 5 Yr. Avg. 19.81 17.64 25.99 18.96 12.86 19

Efficiency HD Lowes Sears Industry Sector S&P 500Receivable Turnover (TTM) 49.8 224.23 4.83 46.86 16.79 9.83Inventory Turnover (TTM) 5 4.54 4.66 4.84 18.36 12.26Asset Turnover (TTM) 1.92 1.77 1.12 1.86 1.09 0.92

Stock Comparison: 1 year

Stock Comparison:3 years

Trend Analysis

QuickTime™ and aTIFF (Uncompressed) decompressorare needed to see this picture.

Trend AnalysisContinued

QuickTime™ and aTIFF (Uncompressed) decompressorare needed to see this picture.

Common Size AnalysisNet Sales January-04 January-03 January-02CGS 68.25 68.91 69.85S/G/A 21.19 21.08 20.94Oper. Inc 10.56 10.01 9.21Interest Exp. 0.1 0.06 0.05Income Tax Expense 3.92 3.79 3.57Income Before XO items 6.64 6.29 5.68EBIT 10.56 10.01 9.21Reinvested Earnings 5.72 5.45 4.94

% of Total Liabilities & EquityAccts. Payable 14.98 15.19 13.02ST Borrowing 1.48 0.02 0Other ST Borrowing 11.28 11.56 11.61Current Liabilities 27.74 26.77 24.63LT Borrowings 2.49 4.4 4.74Other LT Borrowings 4.7 2.84 2.13Total Liabilities 34.93 34.02 31.49Total Common Equity 65.07 65.98 68.51Shareholder Equity 65.07 65.98 68.51

% of Total AssetsCash and Near Cash 8.21 7.29 9.38Marketable Securities 0.08 0.22 0.26Acct. & Notes Rec. 3.19 3.57 3.49Inventory 26.36 27.78 25.48Other Current Assets 0.88 0.85 0.64Total Current Assets 38.7 39.71 39.26Net Fixed Assets 58.26 57.21 58.25

Free Cash Flow Inputs(18%)

Name of Company Home Depot, Inc.

Insert Initial Free Cash Flow (Computer) $1,984.87Insert Initial Growth Rate 18.00%Insert Terminal Growth Rate 5.00%Insert Weighted Average Cost of Capital 10.33%How Many Years is Growth Projected 10Number of Shares of Common Stock 2,289.00Tax Rate 37.06%Total Debt Outstanding $2,018.00

Estimate Free Cash FlowCurrent Sales ($) $64,816.00EBIT Margin (%) 10.56%EBIT $6,846.00Plus - Depreciation $1,076.00Less - Capital Expenditures $3,508.00Less - Net Change in Working Capital ($108.00)Equals Operating Cash Flow $4,522.00Less Taxes $2,537.13Equals Free Cash Flow $1,984.87

Estimate Weighted Average Cost of Capital10.640% Cost of Equity Capital

4.590% Before Tax Cost of Debt6.000% Market Risk Premium (RM-RF)3.964% Debt Ratio (Total Debt/Total Assets)

0.940 Beta5.000% Risk-free Rate (Use L-T Treasury Rate)

10.333% = Weighted Average Cost of Capital

Free CashFlow Model (18%)

Year 0 1 2 3 4Free Cash

Flow$0 $2,342 $2,764 $3,261 $3,848

Terminal Value

Total FCF $0 $2,342 $2,764 $3,261 $3,848Discounted

FCF $0 $2,123 $2,270 $2,428 $2,597

5 6 7 8 9 10

$4,541 $5,358 $6,323 $7,461 $8,804 $10,388

$204,545

$4,541 $5,358 $6,323 $7,461 $8,804 $214,934

$2,777 $2,970 $3,177 $3,397 $3,634 $80,401

Net Present Value of FCF

$105,774

Net Present Value of FCF Minus Debt

$103,756

Per Share Value $45.33

Free Cash Flow Inputs(12%)

Estimate Free Cash FlowCurrent Sales ($) $64,816.00EBIT Margin (%) 10.56%EBIT $6,846.00Plus - Depreciation $1,076.00Less - Capital Expenditures $3,508.00Less - Net Change in Working Capital ($108.00)Equals Operating Cash Flow $4,522.00Less Taxes $2,537.13Equals Free Cash Flow $1,984.87

Estimate Weighted Average Cost of Capital10.640% Cost of Equity Capital

4.590% Before Tax Cost of Debt6.000% Market Risk Premium (RM-RF)3.964% Debt Ratio (Total Debt/Total Assets)

0.940 Beta5.000% Risk-free Rate (Use L-T Treasury Rate)

10.333% = Weighted Average Cost of Capital

Name of Company Home Depot, Inc.

Insert Initial Free Cash Flow (Computer) $1,984.87Insert Initial Growth Rate 12.00%Insert Terminal Growth Rate 5.00%Insert Weighted Average Cost of Capital 10.33%How Many Years is Growth Projected 10Number of Shares of Common Stock 2,289.00Tax Rate 37.06%Total Debt Outstanding $2,018.00

Free CashFlow Model (12%)

Year 0 1 2 3 4Free Cash Flow $0 $2,223 $2,490 $2,789 $3,123Terminal Value Total FCF $0 $2,223 $2,490 $2,789 $3,123

Discounted FCF $0 $2,015 $2,045 $2,076 $2,108

5 6 7 8 9 10$3,498 $3,918 $4,388 $4,914 $5,504 $6,165

$121,381$3,498 $3,918 $4,388 $4,914 $5,504 $127,545

$2,139 $2,172 $2,205 $2,238 $2,272 $47,711

Net Present Value of FCF $66,980

Net Present Value of FCF Minus Debt

$64,962

Per Share Value $28.38

EVA & MVA InputsCALCULATION OF EVA AND MVA

Name of Company Home Depot Year 2004

Short-Term Debt $0.00

Long-Term Debt $1,509.00

Preferred Dividend $ per share

Preferred Stock Price per share

Preferred Stock $0.00 $0.00 $0.00

Common Stock $119.00

Paid-In Capital $6,184.00

Retained Earnings $19,680.00

Total Invested Capital $27,492.00

Price of Stock $39.27

Number of Shares Outstanding 2,289.00

EBIT $6,846.00

Tax Rate 37.10%

Less: Taxes $2,539.87Equals NOPAT $4,306.13

Rate on Short-Term Debt 2.43%

Rate on Long-Term Debt 4.59%

Market Risk Premium 6.00%

Risk-Free Rate (L/T Treasury bond) 4.50%

Debt to Equity Ratio 0.06

Beta of Stock 0.94

Cost of Preferred Stock 0.00%Cost of Equity Capital 10.140% % S-T Debt % L-T Debt % Equity % Preferred StockWACC 9.84% 0.00% 5.49% 94.51% 0.00%

EVA & MVA ModelCALCULATION OF EVA - ECONOMIC VALUE ADDED

EBIT Less: Taxes

Equals: NOPAT (Net

Operating Profit After

Tax)

Equals: Invested Capital WACC

Capital Charge

EVA (NOPAT -

Capital Charge)

$6,846.00 $2,539.87 $4,306.13 $27,492.00 9.84% $2,703.94 $1,602.19Firm is Creating Shareholder Wealth

CALCULATION OF MVA - MARKET VALUE ADDED

Market Value of Equity

Plus: Market Value of Debt

Equals: Market Value

of Firm

Minus: Total Invested Capital

Equals: MVA

$89,889.03 $1,509.00 $91,398.03 $27,492.00 $63,906.03Firm is Creating Shareholder Wealth

Alternative ValuationInputs

Growth Rates

1994 1995 1996 1997 1998 1999 2000

Net Earnings 457$ 605$ 732$ 938$ 1,160$ 1,614$ 2,320$ Dividends

Paid 50$ 68$ 90$ 110$ 139$ 168$ 255$ Shareholder

Equity 2,814$ 3,442$ 4,988$ 5,955$ 7,098$ 8,740$ 12,341$ Shares

Outstanding 2039.00 2142.00 2151.00 2196.00 2286.00 2321.00 2342.00

2001 2002 2003 2004 10 year 5 year

Net Earnings 2,581$ 3,044$ 3,664$ 4,304$ 25.14% 21.67%Dividends

Paid 371$ 396$ 492$ 595$ 28.10% 28.78%Shareholder

Equity 15,004$ 18,082$ 19,802$ 22,407$ 23.06% 20.72%Shares

Outstanding 2352.00 2,353$ 2,344$ 2,287$

Alternative ValuationRatios

1994 1995 1996 1997 1998 1999 2000Return on

Equity 16.24% 17.58% 14.68% 15.75% 16.34% 18.47% 18.80%EPS $0.22 $0.28 $0.34 $0.43 $0.51 $0.70 $0.99

Shareholder Equity per

share 1.38$ 1.61$ 2.32$ 2.71$ 3.10$ 3.77$ 5.27$ Dividends Per

Share 0.02$ 0.03$ 0.04$ 0.05$ 0.06$ 0.07$ 0.11$ % of

dividends 10.94% 11.24% 12.30% 11.73% 11.98% 10.41% 10.99%Book Value

Per Share 1.38$ 1.61$ 2.32$ 2.71$ 3.10$ 3.77$ 5.27$

2001 2002 2003 2004 10 year 5 year 11 yearReturn on

Equity 17.20% 16.83% 18.50% 19.21% 18.11% 17.24%EPS $1.10 $1.29 $1.56 $1.88 23.93% 21.85%

Shareholder Equity per

share 6.38$ 7.68$ 8.45$ 9.80$ Dividends Per

Share 0.16$ 0.17$ 0.21$ 0.26$ % of

dividends 14.37% 13.01% 13.43% 13.82% 13.13% 12.20%Book Value

Per Share 6.38$ 7.68$ 8.45$ 9.80$

Alternative ValuationModel

Shareholder Equity Per

ShareEarnings Per

ShareDividends per

share RE/S2003 9.80$ 1.88$ 0.25$ 1.63$ 2004 11.43$ 1.97$ 0.26$ 1.71$ 2005 13.14$ 2.27$ 0.30$ 1.97$ 2006 15.11$ 2.60$ 0.34$ 2.26$ 2007 17.38$ 2.99$ 0.39$ 2.60$ 2008 19.98$ 3.44$ 0.45$ 2.99$ 2009 22.97$ 3.96$ 0.52$ 3.44$ 2010 26.41$ 4.55$ 0.60$ 3.95$ 2011 30.36$ 5.23$ 0.69$ 4.55$ 2012 34.91$ 6.02$ 0.79$ 5.23$ 2013 40.14$ 6.92$ 0.91$ 6.01$ 2014 46.15$ 7.95$ 1.04$ 6.91$

P/E Ratio Estimated Price in 10 years Rate of Return*

5 - Year Low 13.36 106.27$ 10.00%5 - Year High 80.13 637.35$ 31.00%5 - Year Avg. 46.745 371.81$ 24.30%

*If bought at the current market price.

To earn an average of 25% return on Home Depot in 10 years SMIP wants to buythe stock at around $37.75.

Long Term US Treasury Bond

Present Value Per Share Earnings 1.88$ 30 Year Long Term Treasury Bond 5.38%

35.01$

Basic Valuations Inputs

STOCK VALUATION MODELS

NAME OF COMPANY Home Depot, Inc.

LAST YEAR 2003 YearNUMBER OF SHARES OUTSTANDING (Mil.) 2,289.00 Millions of SharesMARKET PRICE OF STOCK / SHARE $39.25 Dollars Per Share $0.00 Price of StockNET INCOME AFTER TAXES $4,304.00 Millions of Dollars Expected inTOTAL SALES OR REVENUES $64,816.00 Millions of Dollars 5 yearsBOOK VALUE OF EQUITY (FROM BALANCE SHEET) $22,407.00 Millions of DollarsRISK FREE RATE (L/T T-Bond) 4.50% Annual Percentage RateDIVIDENDS PAID (TOTAL AMOUNT PAID) $595.00 Millions of DollarsSTOCK REPURCHASES (TOTAL AMOUNT PAID) $1,554.00 Millions of DollarsREQUIRED INFORMATION FOR CALCULATION OF REQUIRED RATE OF RETURNBETA OF STOCK 0.94MARKET RISK PREMIUM (5%-6% Historically) 6.00% Expected Market Risk Premium %REQUIRED INFORMATION FOR VARIABLE GROWTH RATE VALUATIONSEXPECTED GROWTH RATE (EARNINGS OR DIVIDENDS & STOCK REPURCHASES) 12.0000% 12.0000% 12.0000% 12.0000% 5.0000%

Must be positive values in each cell

All Data Required

Required Data

Basic ValuationModels

COMPUTER-GENERATED CALCULATIONS

STOCK VALUE - ZERO GROWTH MODEL $8.22

STOCK VALUE - CONSTANT GROWTH MODEL $76.54

STOCK VALUE - VARIABLE GROWTH MODEL $19.47

STOCK VALUE - DIVIDEND & EARNINGS MODEL $4.53

STOCK VALUE - PRICE / EARNINGS MODEL $112.36

COMPUTER-GENERATED CALCULATIONS

EARNINGS PER SHARE $1.88LAST CASH DIVIDEND & STOCK REPURCHASE PAYMENT PER SHARE $0.94

EXPECTED ANNUAL GROWTH RATE (EARNINGS OR DIVIDENDS & STOCK REPURCHASES) 10.07%

EXPECTED EARNINGS PER SHARE IN 5 YEARS $2.00SUSTAINABLE RATE OF GROWTH 9.62%

REQUIRED RATE OF RETURN (k) 10.14%REQUIRED RATE OF RETURN (k) 12.71%REQUIRED RATE OF RETURN (k) 11.42%

CAPMDividend Discount ModelAverage of CAPM and DDM

Summary of Valuations

•Basic Stock Valuations: $76.54 or $19.47

•EVA & MVA: Creating Shareholder Value

• Free Cash Flow (18%): $45.33

• Free Cash Flow (12%): $28.38

• Value Pro: $44.5

•Alternative Valuation: Buy Below $37.5

Analysts Recommendations

Consensus Company Fiscal Year Last Recommendation End Month Updated

OUTPERFORM January 19-Oct-04

Analyst Recommendations and Revisions 1-5 Linear Scale Current 1 Month Ago 2 Months Ago 1 Year Ago

(1)BUY 8 9 10 11(2)OUTPERFORM 6 6 6 5(3)HOLD 11 10 11 11(4)UNDERPERFORM 1 1 0 0(5)SELL 0 0 0 0No Opinion 2 3 3 2

Mean Rating 2.19 2.12 2.04 2

Risk

• Risk vs. Volatility

Risk to HD

• Higher interest rates reduce home improvement projects

• Suppliers raise prices - increased costs• Over-expansion -growth is too rapid• Growth into emerging markets doesn’t work• Relatively low profit margin - any economic

slowdown could hurt earnings (unlikely)

Why Home Depotfor SMIP

• Leader in the Industry– Twice the size of Lowes

– Almost all ratios are better than Lowes• High ROE and ROA

• Growth stock selling at a discount– HD plans to open 200 new stores per year

– Moving into both Mexico and Canada (Lowes isn’t expected to move internationally for three years)

– Price to Earnings near all-time low

Why HD For SMIP Continued

• Management appears to be rational– Low dividends due to ability to reinvest shareholders

money at higher rates than shareholders can achieve

• Consistent Operating History

– Superior Growth rates

• Favorable long-term perspective

– Growing investments into homes

• We understand how the company works

Recommendation

• Shares to Buy: 200

• Buy Price: $37.5

• Set 15% floor: $31.88

• Set Ceiling: P/E ratio of 60 or above

• Don’t buy until price drops below target buy price after election