Value Line Publishing Case Anlysis

YUHONG CHEN        

701733449

Case Analysis-Value Line Publishing, October 2002

  In this case, i need to analysis that if the forecast for Home Depot is accurate. And compare which company is better between Home Depot and Lowe’s. I am going to show Lowe’s Ratio analysis and financial forecast.

 1 Is forecast for Home Depot OK?

  I think Home Depot forecast in this case are not clear. From the charts we can see that Sales growth  decreased for the past three years, for the reasons might included GDP fall down for those years. However, the exhibit 6 showed that after year 2002, sales growth for existing store has a significant increase from 2001 to 2004, although the Economic environment has a turn to good. But the double increase of sales growth for existing overestimate, especially sales growth for existing keep decreasing in the past three years.Supporting this assumption requires a strong view of the success of Home Depot and Lowe’s in diverting the professional market from hardware and lumberyard retailers.

  Second, the depreciation we can see from exhibition 8, they assumed depreciation/sales always same.4%, but I think it is not accurate, because the sales growth always fall down after the increase in year 2002. And for the 4% they don’t think enough about the whole market and economic environment, and the changes of its own market. So it is not accurate.

2 Compare Home Depot and Lowe’s

  The financial ratios in exhibit 7 show Home Depot 5 year average ROC was 15.22%
showing a positive company profit as a percentage of total capital. The ROE was 17.52% reflecting  positive ability to make profit. The average for Lowe’s was ROC of 10.6% and a ROE of 14.6%. Using these ratio, the investors prefer to go with Home Depot. Home Depot also showed a higher 5 year average gross margin of 30.52% compared to Lowes of 27.59%.  For the average gross margin which means that Home Deport can earned more than Lowes for each dollar they spend in sales. The operating margin (EBIT/Sales) for the lowes in these five year are 6.2%, 6.8%, 7.4%, 7.5% and 8.1% respectively. And for the Home Depot, Operating margin which is 7.8%, 8.8%        , 9.9%, 9.2% and 9.2%, are all higher than Lowes. This is means that Home Depot has better quality of its company to make money.