Leeb: At Home with Home Depot

12/20/2002 12:00 am EST


Stephen Leeb

Founder and Research Chairman, Leeb Group

"This is a buy-the-dip, not a sell-the-rally market," says Stephen Leeb, editor of Personal Finance. "Monetary and economic indicators point to higher prices during the next six to 12 months." The advisor is recommending the purchase of Home Depot, a "foundation" stock in the newsletter's growth portfolio. Here's his review:

"Home Depot (HD NYSE) is finding it hard to please Wall Street. In the third quarter, profits jumped by more than 20% to 40 cents a share from the year-ago number of 33 cents. Moreover, the company reiterated that profits for the full year should be in line with previous estimates of $1.58 a share, 22% above last year's results. The stock dropped sharply on the news and remains well underwater for the year. Wall Street's problem is that the gains came mostly from sharply improved profitability. Revenues rose less than 10% and same-store sales declined. Moreover, the company said that it expects further declines in same-store sales.

"While we would prefer to see Home Depot running on all cylinders--rising same-store sales and rising margins--we're giving CEO Mr. Nardelli the benefit of the doubt. His strategy is to first become a leaner and meaner competitor, and then compete. It's a lot easier, after all, to grow revenues when you're far more profitable than your competitors. By most measures, the firm has the best balance sheet in all of retailing, with more than $4 billion in cash and $20 billion in equity. Its two main goals in stretching its empire are to move into the original construction market and establish itself internationally. Though it may tread water until revenues improve, trading at 14 times next year's earnings, the stock is a compelling value. Buy Home Depot up to 28."

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