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Case 12: Value Line Publishing, October 2002

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Kyle Fortin
Case 12: VALUE LINE PUBLISHING, OCTOBER 2002

From a profitability standpoint, Home Depot created value, according to their 12.3% WACC found in exhibit 3. They are consistently creating value in all years (97’-01’) beings their ROC is higher than their WACC. Considering the Industry ROE average was 17.1% in 1997 according to Wikinvest.com, Home Depot was a little behind the game as far as creating value for their investors. Home Depot’s Gross Margin increased steadily each year, indicating higher profits, as well as their operating margin increasing to a high in 99’ and leveling out around 2001 due to the economic factors erupting after 9/11. Their NOPAT margin is higher than their biggest competitor lowe’s so they were consistently producing more returns, in conjunction with greater sales figures. Home Depot is operating on relatively wide margins compared to its competitors; its substantial growth rate is quite high compared to Lowe’s which is easily explained by their innovative business strategy. The Home Depot at the end of 2000 stands on good financial footing. Their net revenues have grown 208% between FY 1995 and FY 2000. Home Depot continues its market saturation strategy which consistently grows their net revenues. Home Depot’s growth in net earnings over the same period has been 284%. The money that the firm is retaining as profits is larger than the total amount being brought into the company, indicative of a company that is realizing economies of scale in their operations and increased brand awareness. From the ratio analysis in exhibit seven we see that in 1998, Home Depot was leading Lowes in all of the profitability ratios listed except earnings per share. Lowe’s EPS equaled $1.37 to Home Depot’s $0.73. This is in part due to the fact that Lowes is significantly more leveraged with debt than Home Depot. This is displayed in the debt

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