For some reason, people take Wall Street analysts' stock forecasts seriously. This is great for those of us who don't.
Recently, analysts at Credit Suisse and FBR Capital Markets cut their earnings forecasts for Home Depot
The forest for the trees?
I'm not excited about Home Depot's stock just because Wall Street isn't. I've liked this company for a while and have been waiting for a cheaper buy-in price. Still, a look at the reasons for Wall Street's newfound disdain for the company is useful (if only for humor purposes).
So what was the reason? Stephen Chick, the analyst at FBR, cited "a slight downshift in tone" in management's voice in recent conference calls and press releases.
Pardon me while I laugh hysterically.
But why do I think the stock is cheap?
Here's my homework
Home Depot is a company that has been focused on adding stores for most of its history. From 2000 to 2007, the company roughly doubled its store base from 1,134 to 2,234 stores, averaging over 150 new outlets each year. This contributed to great top-line growth, as sales climbed to $77 billion in 2007. In that era, to keep making more money, all management had to do was keep adding stores. This worked out great until late 2007, when the housing and economic downturn started to take hold. Suddenly, demand for home improvement products wasn't as robust, and adding new stores didn't make great economic sense. Management seemed stumped, and then-CEO Robert Nardelli's $131 million in total compensation in 2006 was starting to look a bit rich.
Cutting the fat
Amid growing shareholder discontent with his performance, Nardelli was given the boot in 2007. But I'm now interested in where his successor, Francis Blake, is taking the company. As soon as he took over, Blake started making some drastic changes. Or, more accurately, he started cutting things that needed to be cut. He slashed executive compensation -- over the last three years, he has averaged about $9 million in total compensation, a substantial cut from that of his predecessor in his final year. Blake cut the company's tangential businesses, which included stores such as EXPO Design Center and The Home Depot Design Center, which were targeted toward contractors and interior designers and not really in the same business as the standard Home Depot stores. And he chopped the budget for new stores, drastically slowing the chain's expansion.
Staying on top of a new game
Blake recognizes that Home Depot's new game is not about store growth but market share. So far, Home Depot is winning that game: with over 2,200 stores, Home Depot believes it commands 21% of the U.S. home improvement market. That puts top competitor Lowe's
Preparing for battle
Blake has been preparing his ship for the market share battle. Instead of focusing on adding stores, he is spending cash on building a new distribution center that will allow for shorter lead times in delivering inventory to stores. This is key for stocking stores with snowblowers and snow shovels just before an unanticipated mid-Atlantic blizzard or getting patio furniture and lawnmowers into stores for an unseasonably warm March. The new distribution system, which is on track to cover 100% of stores by the end of the year, will also allow stores to develop unique product mixes based on local demand, because, after all, the home improvement products most in demand in southern California are quite different from those in New England.
Blake's other key focus has been on customer service. Under the new training program, Home Depot's intends to have all its employees familiar with the entire store, not just a given department. I recently visited several Home Depots as part of my research, and it seems to be working. I asked an easily spotted, orange-aproned employee in the garden section for help with paint, and sure enough, he walked me over to that department and starting explaining the differences among the products. But you don't have to rely on my anecdotal tale as evidence that customers are increasingly pleased with their Home Depot experience -- the firm's Net Promoter score, which measures a customer's likelihood to recommend the store, has increased a substantial 8 percentage points in just the last year.
Cheap enough for a Fool
The home improvement landscape is changing. It's becoming less about growth and more about market share. Home Depot, led by a capable CEO very much in touch with the business, is making all the right moves. And, thanks in part to a couple Wall Street analysts, right now we have a great buy-in price on this stock.
Unless you invest based on the tone of management's voice.
Alex Pape does not own shares of any companies mentioned. Home Depot, Lowe's, and Wal-Mart are Motley Fool Inside Value selections. Motley Fool Options has recommended writing puts on Lowe's. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.