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Monday, February 4, 2008

* Stock Analysis: HD-The Home Depot, Inc.

Linked here is a PDF copy of my analysis of The Home Depot, Inc. (HD) (alt.1, alt.2). Below are some highlights from the above linked analysis:

Company Description: The Home Depot, Inc. operates as a home improvement retailer primarily in the United States, Canada, and Mexico.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description: 1.) Avg. High Yield Price, 2.) 20-Year DCF Price, 3.) Avg. P/E Price and 4.) Graham Number. HD is trading at a discount in 3 of the 4 valuations listed above - 1.) Avg. High Yield Price, 2.) 20-Year DCF Price and 3.) Avg. P/E Price. If I exclude the high and low valuation, and average the remaining two valuations, HD is trading at a jaw-dropping 43.3% discount. HD gets a Star for being fairly valued.

Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description: 1.) Rolling 4-yr Div. > 15%, 2.) Dividend Growth Rate, 3.) Years of Div. Growth, 4.) 1-Yr. > 5-Yr Growth and 5.) Payout 15% of avg. HD earned 3 of the 4 available Stars in this section - 1.) Rolling 4-yr Div. > 15%, 2.) Dividend Growth Rate and 3.) Years of Div. Growth. Dividends will double every 5 years if they grow by 15%. A Star was earned for 1.) above since dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (1998-2001, 1999-2002, 2000-2003, etc.)

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description: 1.) NPV MMA Diff. and 2.) Years to >MMA. HD earned 1 Star in this section for 1.) NPV MMA Diff. HD's NPV MMA Diff. was an impressive $81,874. That means if the historical dividend growth rate were to continue into the future, the NPV of HD's dividend income in excess of what could be earned on a 4.6% MMA over 20 years would be $81,874 per $1,000 invested.

Other: HD is the reigning champion of the home improvement super stores. However, it has recently taken some body blows from the economic downturn in housing and from its leading competitor, Lowe's. Many analysts are projecting 2008 to be a difficult year in this sector. A recurring criticism on HD has been poor customer service compared to its rival Lowe's. The company has taken steps to improve its customer service. Though I am a shareholder of HD, I am a customer of LOW - I continue to drive by a HD to shop at LOW.

Conclusion: HD earned one Star in the Fair Value section, three Stars in the Dividend Analytical Data section, and one Star in the Dividend Income vs. MMA section for a total of Five Stars, which rates it as a 5 Star-Strong Buy.

HD is expected to increase its dividend in an announcement later this month. I am currently treating HD as a "hold" pending its dividend announcement.

Disclaimer: As always this is only my opinion and you should not rely on it. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I own shares of HD.

What are your thoughts on HD?

Coming up tomorrow in round 2, the contender: LOW-Lowe's Companies, Inc.

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