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The BMW Method
Home Depot - Steady Performer

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By Duxx2001
October 18, 2007

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This is just an exercise that I normally do with companies that maybe fall into the BMW category. This is a long post.

When I look at companies from the BMW perspective...I want to see two things:

1) consistency
2) predictability

For the last year HD has been some sort of a roller coaster.

The BMW charts do not look impressive and do not give us a sufficient clue about their true CAGR. We only can say is the lowest CAGR in history.

BAD NEWS
Many bad news for the company, especially:
a) Slow Down in housing.
b) More competition with Lowe's
c) Bad customer service experience
d) Nardelli's bad press
e) Foray into bad businesses.

IS THE COMPANY CONSISTENT & PREDICTABLE?

ROEEPSRetention Est.EPS  Act.Retained
GrowthRateGrowthEPS
1 Yr19.20%2.60%75.60%14.50%-9.10%
3 Yr21.20%17.00%82.10%17.40%14.30%
5 Yr21.70%18.00%83.80%18.20%16.60%
10 Yr22.70%22.00%85.70%19.50%21.10%
15 Yr21.90%22.70%86.90%19.00%21.10%
SalesDiv.PriceDiv.Total
GrowthGrowthGrowthYieldReturn
1 Yr20.10%70.00%-8.30%1.80%-6.50%
3 Yr17.00%37.80%-3.10%1.20%-1.90%
5 Yr14.90%32.00%8.00%1.00%� 9.00%
10 Yr18.10%29.80%7.30%0.70%� 8.00%
15 Yr20.80%32.50%10.30%0.60%10.90%


This is a extremely consistent business.

a) ROE around 21% over 15 years.
b) EPS growth over 15 years closely resembling ROE. Last 5 years trending down, especially last year 2006. Competition is impacting the company, plus some underperforming businesses.
c) BUT the estimated EPS growth based on retention rate and ROE is fairly consistent with the Act. Retained earnings growth, except for last year. I still see consistency and a good business.
d) Sales growth is going up.
e) PLEASE look at the price growth over thee years, is not even keeping pace with the current growth of the company. There is something strange here... the company is able to earn 20% but the stock is doing nothing for the last 15 years.


SOME INTERESTING FINANCIAL NUMBERS
(numbers are sales/share/years)

15 Yrs10 Yrs5 Yrs3 Yrs1 Yrs
Sales19.2125.4934.2139.4546.11
EPS1.161.582.242.592.79
Div0.180.250.380.470.68
Div Yield
Shares Out2,160.612,230.212,183.742,084.231,970.00


Income Statement (All Numbers below are $ Avg/year)

Sales ($M)56,06173,70181,81490,837
Gross Margin32.60%33.50%33.70%32.80%
Gross Proft18,25624,69327,61029,795
Operating Margin11.80%12.50%12.80%12.60%
Operating Profit6,6229,23210,49911,445
Depreciation9021,3061,5181,762
Capex3,0703,5263,7903,542
EBITDA- CAPEX3,5525,7066,7087,903
Income Tax Rate38.10%37.30%37.30%38.10%
Net Income3,5294,9145,5335,761
% Capex / Sales6.30%6.70%6.80%6.30%

Based on the above, I see again consistent growth. Gross margins are interesting - Over 15 years the average gross margins are 32.6% but the last 10 years and 5 year period, the margins increased to 33.5% avg. Last year the numbers came back to the long term average (reversion to the mean at play here). But the company was able to gain some economies of scale and leverage some fixed cost as shown in the operation margin.

COMPETITOR NUMBERS
We all are concerned about Lowe's stiff competition, how they are doing?

ROEEPSRetenEst.EPSRetained EPS
GrowthRateGrowthGrowth
1 Yr 22.00%15.00%92.00%20.20%13.00%
3 Yr 22.90%21.20%93.20%21.40%20.10%
5 Yr 23.70%25.50%94.00%22.30%25.50%
10 Yr 22.80%24.90%92.90%21.10%25.70%
15 Yr 21.00%27.80%89.60%18.80%31.50%

SalesDivPriceDivTotal
GrowthGrowthGrowthYieldReturn
1 Yr 11.60%45.50%-4.00%0.50%-3.50%
3 Yr 16.90%47.40%2.40%0.40%2.80%
5 Yr 17.30%32.00%8.80%0.30%9.10%
10 Yr 17.40%18.20%19.70%0.30%20.00%
15 Yr 17.80%14.90%24.80%0.50%25.30%

It seems that Lowe's has much better financials and at least for the last 15 years has offered better returns to investors. BUT the stock has languished in the last 5 years, having a discrepancy with the economics of the business and it's growth.

SOME POINTS TO CONSIDER
a) Both companies seem to offer a good future return to investors, BUT clearly HD seems to have the best opportunity of the two.
b) Economics of the two businesses seems not to be very, very discrepant (But LOW seems to have better margins today)... and I see that both will be able to split the market for the benefit of the two...
c) Current concerns on housing seems to be impacting both companies.