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Home Depot
Home Depot; Past & Future

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By 1000
January 23, 2003

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Hi Totally,

Is there really any hope for international growth?

I think a better question, is do they have to worry about that now. The hardware industry is still very fragmented and there are a lot of growth opportunities for the major hardware superstores in the US.

I think Home Depot has taken some impressive steps to capture the professional building business. And their tool rental business seems to be growing well. I have linked some news in previous posts concerning them entering the professional markets. Lowe's is doing this too, though. It is still a race. And there is room for two winners. Eventually, one will prove themselves the undisputed number one. But that may be some time yet.

Everyone sees the various tech companies as horribly depressed presently. But no one is really surprised. But when a recession hits and Home Depot falls, it creates a sense of dread. Everyone wants to know why. It is easy to examine companies like JDSU and come up with answers why it is down. But with Home Depot it is more difficult. It has been a premier safe haven for investors' money for many years.

So, we hear cries of maturity. It's a mature company. It will no longer be the growth company it once was, so its time to sell. But is it priced as a growth company now?

Home Depot's PE today is 13.8. In 1990, it had an average PE of 25.4 and in 1993 an average PE of 42.3. I will expand on this later. Value Lines says Home Depot will grow earnings at a 19% clip in the next five years. Of course, that may not happen, but that is their latest estimate, nevertheless. The company guides that its earnings will come in as expected which will mean earnings will grow 19% from the previous fiscal year, 2001. Yep, they are pretty sickly. Hehehe

Home Depot's stock has managed nearly a triple from 1995's low to this year's low, a compounded gain of 14.58%. If I take this back to 1984 the compounding rate increases to 17.84%. This is incredible for 18 years of solid in your face growth. If you go back further the compounding rate goes up further. But to prove that I would have to go back to my most ancient Home Depot notebook and it is in the lockbox archives under a huge pile of other such stored away old notebooks of mine. It is a dark and gloomy place where no one has treaded for a while. I would prefer not to venture there for now.

But this proves my point � Home depot is maturing.

Home Depot is maturing and we will never have returns like the past. And that is probably true. But will Home Depot under perform the market? No, I don't believe so, which brings me to another point.

Recession does horrible things to good stocks. They make them go down in price. There are some companies that have done well in today's market, but most have been hit pretty hard across the board and across all industries. Washington Mutual (WM) has bucked the trend, it is near its 52 week high. But WM represents a minority of issues.

Yes, but Home Depot is different. It has never done this before. Right?

No, this would be a wrong statement. In 1990, our last recession, Home Depot dropped nearly 50% from its high. Sound familiar?

Yet, Home Depot was going to see earnings compound at a 25.55% for the next 12 years. Who sold the stock in 1990? I bet he is kicking himself now.

You might ask, were earnings bad in 1990? No, the recession did not hurt Home Depot's earnings. Their earnings came in 40% higher than in 1989. Was it over-priced in 1990, you might ask? Its average PE for the year was 25. This was a shade less than the growth rate they were going to experience in the next 12 years. Spooky, huh?

What happened back then?

It was a recession. War with Iraq loomed, junk bonds were the Enron of the day, local governments faced huge deficits, banks suffered huge loan losses from overseas exposure � I am also a long-term holder of C. There were rumors that many of the large banks were going to go under without government intervention. It was said that the US could not compete with the Japanese and we were doomed to third-world status. In 1989, the Nikkei hit its peak of 39,000; they virtually ruled the world to hear it told then. It was after all a remarkable stock market run.

But 12 years later, none of the above really affected the stock market. The Bull market regenerated and it was off to the races. And Home Depot did the same.

Ten years from now

Its 2012, most people have forgotten the tumultuous years of 2000-2002, Home Depot has delivered earnings growth of 12.79% a year for the last ten years. Only change, Home Depot has brighter lights in their stores and is frequented more by women than in 2002. It is now priced at 80 rewarding shareholders with a compounded rate of 14.31%. Its price has been higher, but there are rumors that they are more mature now and a recession is looming.

Just for fun

tom


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