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Home Depot: Hammered

Home Depot (HD), No. 1 in home-improvement supplies, has been a dog among the large-caps--down 44% this year, despite the market's recent rally. "We've been trying to find a good reason why the stock has been hammered, and we can't," says John Waterman, chief investment officer at Rittenhouse Financial Services. Second only to Wal-Mart Stores (WMT) in overall retail sales, Home Depot, with 1,400 warehouse-style outlets, has so far been free of the accounting and corporate-governance troubles plaguing so many blue chips. More important, says Waterman, the fundamentals are sound: Earnings are up, and the balance sheet has nearly $6 billion in cash and just $1.3 billion of debt.

The boom in refinancing should give Home Depot a boost: Homeowners often spend their cash infusion on remodeling. But there's usually a six-month lag before the outlays, says Waterman, and the impact has not yet shown up in revenues. Sales for fiscal 2003, ending on Jan. 30, are forecast to rise 16% to 18%, to about $61 billion, helped by the opening of 200 new stores--and by 2%-to-4% same-store sales gains, says Standard & Poor's analyst Tuna Amobi, who rates the stock "accumulate" for the next 6 to 12 months. Gross margins should further benefit from an improved merchandise mix, he adds. Home Depot is launching EXPO Design Centers and other new-format stores and is expanding its overseas sales.

Waterman, who owns shares, is buying more, at the current price of 28--down from 52.60 in February. But he's frustrated that the stock trades at just 15 times 2003 earnings estimates. He thinks it deserves a higher p-e. Analyst Dana Telsey of Bear Stearns says that with Home Depot's "industry-leading position and strong track record," it should trade at 19 times her fiscal 2003 earnings estimate of $1.85, which translates to a price of 35. In 2002, she expects $1.57 a share, up from 2001's $1.29. She rates the stock "outperform." By Gene G. Marcial

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