Value Line Publishing, October 2002

13010 WordsAug 21, 201053 Pages
Valuation and Analysis of Home Depot Inc. Gracie Quintana Jeff Miller Christine Kyrish Steven Poon December 6, 2004 1 Table of Contents Financial Data Snapshot I. Overview of Valuation II. Business Summary Products and Services Competitors Industry Analysis Competitive Strategy III. Accounting Analysis Accounting Policies Degree of Accounting Flexibility Accounting Strategy Quality of Disclosure Quantitative Analysis Red Flags IV. Ratio Analysis and Forecasts Ratio Analysis Section Financial Statement Forecasting Methodology Conclusion V. Valuation Cost of Capital Method of Comparables 1 1 4 4 6 9 15 16 16 19 20 23 23 24 26 27 29 33 34 35 36 2 Discounted Dividends Discounted Free Cash Flows Discounted Residual Income Long Run…show more content…
The sustainable growth rate is quite high compared to Lowe’s which can be explained by Home Depot’s innovative business strategy. Forecasting Sales growth over the past five years has grown fairly consistently. The growth rate in sales is assumed to continue into the future, with a similar upward trend in future earnings. Recently, Home Depot has taken on more short term debt, but this should not impact their capital structure significantly. Total assets have been steadily increased over the past five years and that trend is expected to continue. There is not a large spread between the operating cash flow and earnings, which is a good sign for the quality of accounting information. The growth trend in assets and income and cash flow can be expected to increase because of expansion into other countries, mainly China and Mexico. Valuation Different methods of valuation were used to assess the value of Home Depot. We have the most faith in the abnormal earnings growth, residual income, and discounted cash flow valuation methods. In the abnormal earnings and residual income model, the stock was overvalued. In the discounted cash flow method the stock was slightly undervalued. In the method of comparables valuations, the stock was most accurately priced by the P/E method. If modest growth rates are assumed, along with a beta slightly above the market’s

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