Atlanta, GA, October 21, 2005--Home Depot shares reached their highest point in more than a month Thursday after an analyst said the company's well positioned to handle the triple threat of a bursting housing bubble, higher energy prices and slowing consumer spending.
In upgrading the Dow Jones Industrial Average component Bear Stearns analyst Dana Telsey pointed to Home Depot's investments in technology as well as efforts to diversify its business as potential catalysts for sales and earnings gains.
She tagged the stock with a market perform rating, up from peer perform previously.
Telsey credited Bob Nardelli, Home Depot's chief executive, for implementing more sophisticated technology tools since he took the helm in 2000. That, of course, came with a hefty price tag -- upwards of $1.25 billion.
"At the time he started, there was no way for management to directly communicate to all stores," she noted. "However, earlier this year and for the first time in the company's history, Home Depot receives sales and inventory data for all domestic stores before the start of business the next day."
Read that as a huge help in better managing inventory and discounting, as well as holding a tighter rein on selling and administrative expenses.
Telsey also likes Home Depot's successes with self check-out and improved check-out systems at manned registers.
As for diversification, Telsey repeated what other analysts have said in recent weeks: Home Depot's girding itself well for a housing slowdown amid what she called "an ever-saturated U.S. home-improvement landscape."
The company's doing so, she said, by pumping up its builder, professional supply and maintenance, repair and operations markets -- broadly referred to as Home Depot Supply.
In July, for example, Home Depot acquired National Waterworks Holdings, a distributor of products used in water and wastewater transmission systems.
"The attractiveness of these market places is a function of their high fragmentation, lower capital-investment requirement, and the ability to leverage the existing infrastructure and gain cost synergies," she said.
Indeed, the parent is projecting that Home Depot Supply will see revenue rise at a 25% clip compared with total revenue forecasts calling for growth in a range of 9% to 12%. Telsey thinks the company will well exceed that forecast.
"In our view, revenues will continue to more than double the increase in retail revenues over the next few years," she said.
But here comes the caveat. In Telsey's view, profit margins generated by Home Depot Supply are generally below-average, meaning they will put pressure on the company's overall gross margin. To overcome that, Home Depot is bundling certain services and products where price is not that big an issue for customers, which she thinks will help the company "avoid commodity-like margins."
"Given integration efforts," she said, "we believe that Home Depot Supply acquisitions will likely result in slight deterioration in the division's operating margin initially and then expansion as economies are gained and integration hurdles are overcome."
