Finance

//Final draft (5/1)://  This chapter takes a look at the financial aspects of The Home Depot and Lowe's as seen from an investor's point of view. Recent balance sheet and earnings figures as well as historical stock values are examined as the two corporations are compared and contrasted..  According to information in their 2008 annual reports, Home Depot is the larger of the two corporations by almost any measure. The Home Depot has 2,233 stores to 1,649 for Lowe's. The Home Depot has 322,000 employees while Lowe's has 228,000. The Home Depot has assets, liabilities and equity of $41.1 billion, $23.4 billion and $17.8 billion dollars respectively. The corresponding figures for Lowe's are $32.7 billion, $14.6 billion and $18.1 billion. The equity figures are intriguing as they show the two companies to have a fairly equal residual value for shareholders even though The Home Depot has almost half again as many stores as Lowe's. The most recent annual net income from operations for the two companies was also practically identical: $2.3 billion for The Home Depot versus $2.2 billion for Lowe's. This metric has declined two years in a row for both companies with The Home Depot experiencing the sharper reductions. The Home Depot's operating income for the fiscal year ending February 2008 was $4.4 billion and the year before it was $5.8 billion. The figures for Lowe's are $2.8 billion and $3.1 billion. Over the same three year period The Home Depot's earning per share dropped from about $2.80 to about $1.35 while Lowe's went from about $2.00 to about $1.50 (The Home Depot, Inc., pp. 16-29; and Lowe's, 2009a, pp. 5, 13 & 28-29). Investors seem to favor The Home Depot despite these bottom line similarities. The Home Depot has 1.71 billion shares of common stock outstanding (The Home Depot, Inc., p. 30). Its stock closed at $25.77 a share on May 1, 2009 (Google, 2009a) giving a current total market value of about $44.07 billion. Lowe's has 1.47 (Lowe's, 2009a, p. 30) billion shares outstanding with a total market value of roughly $30.65 billion given the stock's close of $20.85 on May 1, 2009 (Google, 2009b). The Home Depot stock is valued at 19 times 2008 earnings whereas Lowe's is selling at only 14 times last year's earnings. Investors apparently have higher expectations of Home Depot's future potential. This disparity is puzzling given Lowe's higher earnings per share and the roughly equal shareholder's equity and recent net operating income of the two companies. The Home Depot does have a much higher dividend at $0.90 per share for a yield of 3.49% (The Home Depot, Inc., p. 30) than Lowe's at $0.335 per share for a 1.60% yield (Lowe's, 2009a, p. 28). Having a yield above certificate of deposit interest rates does explain at least part of investor's preference for The Home Depot stock, though this assumes investors have confidence that The Home Depot can sustain this dividend rate. The Home Depot's liabilities are 57% of its assets compared to a ratio of 45% for Lowe's. The Home Depot's total debt is $11.4 billion with $5.0 billion due in five years. Lowe's debt is $6.1 billion with only $0.6 billion due in five years. Home Depot pays over $600 million a year in interest on its long term debt while Lowe's pays over $300 million interest on its long term debt (Value Line, pp. 881-2). It is also interesting to compare assets and liabilities per store for the two companies. Home Depot has $18.4 million in assets per store but the smaller Lowe's has $19.8 of assets per store. Home Depot has ten and a half million dollars in liabilities per store but Lowe's has only $8.9 million. Lowe's financial position seems to be stronger that that of Home Depot. The most likely explanation is that Home Depot has been more aggressive in opening new stores and has borrowed considerably to fund its growth. A book written in 1999 mentions that “Home Depot expects to be operating over 1,600 stores by 2002” (Sagawa & Segal, p. 34). Since Home Depot has over 2,200 stores in 2009 the company opened or acquired at least 600 stores in the last ten years. The growth was actually much greater since Home Depot had 761 stores in 1998. That's 1472 new stores in 11 years, an average of two and a half new stores per week. During the same period Lowe's grew from 484 stores to 1649, averaging just over two additional stores per week (Marcus, Blank & Andelman, p. 162) Lowe's was “founded in 1946 ... [and] went public in 1961, and began trading on the New York Stock Exchange in 1979” (Lowe's, 2009b). In four years the stock price had quadrupled and by the mid-1990s it had increased twenty fold over it's 1979 value. It doubled again around the turn of the century and then tripled again before losing a third of its value in the current depressed market (Google, 2009b). The Home Depot was founded in 1978 and its s tart up capital was two million dollars from a group of forty investors who took a mix of preferred and common stock. The men who created the Home Depot business plan, and who would run the business, received common stock for “pennies a share” (Marcus, Blank & Andelman, p. 53) Bernie Marcus became CEO with 18% of the original common stock, Arthur Blank was the main financial officer with 15% and Pat Farrah, the lumber yard merchandiser got almost 15% (Marcus, Blank & Andelman, p. 65). The Home Depot went public in 1981 and the original preferred sock was converted to common stock (Marcus, Blank & Andelman, p. 94). In a couple years the stock's value had increased twenty fold (Google, 2009a). When Marcus stepped down as CEO in 1997 and Blank took his position (Roush, p. 227) the stock had increased in value another twenty fold (Google, 2009a) making it four hundred times its original value. Three years later Blank retired as CEO in favor of Robert Nardelli who remained in charge until 2006 (Kavilanz). Under Blank the stock's value quadrupled but a slide was in store. “I n his five years as CEO, he [Nardelli] has made more than $245 million, while the company's stock declined 12 percent during the same period” (Marquez). The bear market of 2008 further eroded the stock's value which now under performs versus the Dow Jones industrial average and currently trades at about twice the value if did when Marcus retired as CEO (Google, 2009a). This look at the historical stock values of the two companies shows that investors have greatly favored stock in The Home Depot over that of Lowe's The current market price of the former is over 800 times its late 1970s value while the former trades at a mere 80 times its value from the same era. By comparison the Dow Jones Industrial Average is currently only ten times it's 1978-79 levels. A close look at the most recent annual reports of the two companies leads one to question whether the historical investor bias in favor of The Home Depot stock relative to Lowe's will continue. The per share book value (total equity divided by outstanding shares) of Lowe's stock is $12.31 versus $10.41 for The Home Depot, yet the latter stock trades for five dollars a share more with only a higher dividend to recommend it. **References** Google. (2009a). The Home Depot, Inc. In //Google Finance.// Retrieved on May 1, 2009 from [] Google. (2009b). Lowe's Companies, Inc. In //Google Finance.// Retrieved on May 1, 2009 from []  Kavilanz, Parija B. (2007). Nardelli out at Home Depot. //CNNMoney.com//. Retrieved on May 1, 2009 from []  Lowe's. (2009a). Lowe's Balance 2008 Annual Report. Retrieved on May 1, 2009 from [] Lowe's. (2009b). Our Heritage. In //Company Info / About Lowe's//. Retrieved on May 1, 2009 from []  Marcus, Bernie; Blank, Arthur; & Andelman, Bob. (1999). //Built From Scratch.// New York: Times Business. Marquez, Jessica. (2006). Home Depot Sheds Management Layers, Promotes From Within. Workforce Management. Retrieved on May 1, 2009 from []  Roush, Chris. (1999). //Inside Home Depot.// New York: McGraw-Hill. Sagawa, Shirley; & Segal, Eli. (1999). //Common Interest Common Good.// Boston: Harvard business School Press. The Home Depot, Inc. (2009). The Home Depot 2008 Annual Report [Electronic version]. Retrieved on May 1, 2009 from [] Value Line. (2009). //The Value Line Investment Survey.//   Issue 6, April 3, 2009.