Remodeling Home Depot
Home Depot (HD ), promising to fix itself up under new CEO Frank Blake, got cheers from investors, who welcomed the $90 billion company's honesty in admitting it needed turning around. Sales for fiscal 2007 will be flat, or up just 2%, Blake told investors and analysts on Feb. 28. He'll plow $2.2 billion into the world's No. 1 retailer of home improvement goods. A few months ago, Fidelity Investments dumped 7.1 million shares, and Barclays (BCS ) sold 31 million. After rising from 33 last summer to 41 in mid-February, the stock has dropped to 38.71. "All the bad news--the housing slump and earnings shortfall--is already in the stock, and we think it's very undervalued," says Douglas Davenport, president of Atlanta Investment Counsel, adviser to the Wisdom Fund, which owns shares. Home Depot is the cheapest in its group, with a price-earnings ratio of 14, vs. 15 for Lowe's (LOW ) and 21 for Costco (COST ), notes Davenport, who has a 12-month target of 46. Joseph Feldman of Telsey Advisory Group calls Home Depot an enticing turnaround story. He is convinced Blake will succeed. Brian Postol of A.G. Edwards (AGE ) says Blake is too downbeat in saying earnings will drop 4% to 9% next year. Postol doesn't buy it but has reluctantly trimmed his estimate from $3 to $2.76 a share for 2008 and from $3.40 to $3.06 for 2009. Even so, "we find the shares appealing," says Postol, with a buy/aggressive rating.
Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.
By Gene G. Marcial