Solution Pages: 9
Files that you will download:
Word (.docx) & Excel (.xlsx)
Questions Covered in the Solution
Part One: Stand Alone Analysis: Assess the financial condition of each firm on a
stand alone basis.
Historical Financial Analysis: Home Depot
- Using financial ratios given in the case and other financial metrics, assess the historical
financial performance of Home Depot from 1997 to 2001. What picture are the ratios
painting? What does the trend suggest about the operational performance of the firm?
- What is the sustainable growth rate (SGR) for the firm? What is it telling you? What is the implication when compared to Total Sales Growth?
- Reformat the Income Statement to show EBITDA.
- Calculate EBITDA margin, EBIT margin, COGS margin, Gross Margin, Net Profit margin and Sales per Employee. Analyze the trend over the four year period. What does the trend suggest about the operational performance of the firm?
- Calculate the Free Cash Flow to the Firm ( FCFF) and the Cash Conversion Cycle (CCC). Analyze the trend. What are the drivers? What does the trend suggest about the operational performance of the firm?
- Calculate the historical ROIC and compare to the firm’s WACC. What does the ROIC – WACC spread tell us? What does it suggest with respect to the efficient deployment of capital?
- Given the historical analysis you have performed, what is the overall financial condition of Home Depot?
- Calculate Gross Margins, COGs Margin, EBIT margin and NOPAT margin, CCC, FCFF and ROC on a proforma basis. Assess the trend.
Historical Financial Analysis: Lowe’s
- Calculate the Home Depot ratios given in the case for Lowe’s.
- Perform the same calculations and analysis as number 1 to 8 above.
- Using the assumptions given in the case for Home Depot develop a Pro-forma year forecast for Lowe’s (i.e. 2002 to 2005)
- Calculate Gross Margins, COGs Margin, EBIT margin and NOPAT margin, CCC , FCFF and ROC on a proforma basis. Assess the trend.
Part Two: Comparative Analysis: Comparing the relative financial condition of
- Based on the historical financial analysis performed above, compare the financial relative financial performance of each firm. How do the firms compare? Is one firm clearly in a better financial position than the other? Was Carrie G. correct on her outlook?
- On a proforma basis, given the financial metrics calculated, is one firm in a better financial position than the other?
- Is Carrie correct given your comparative analysis? What should value line do? What would you recommend?
Sample of Solution
- Case Summary
Building retail-supply industry, with the magnitude of $175 Billion, has been traditionally constituted of hardware stores, lumberyards, and large-format home centers. The industry has been poised to grow even though at a comparatively lower rate but still 4.2% for 2001 on the back of robust housing-construction. Dominated by Home Depot and Lowe’s, the industry provides a lucrative investment opportunity due to the potential of significant growth. Both the companies, despite owning a third of the market share, are aggressively investing in their own-store capacity to increase their market penetration. Moreover, with the fierce competition, the industry is facing consolidation, rooting out the smaller players.
For Instance, Home Depot has acquired different warehouse companies, including flooring company which would eventually entitle Home Depot as the largest supplier of flooring in the residential properties. Whereas, the company has established a significant footprint in the Professional customers’ market, Home Depot has also gained international exposure with its presence in Mexico and Canada. While focusing on improving market share in product sales through segmentation, the company has also expanded its revenue horizon using installation services which currently at $ 3 Billion and are poised to grow at 30% per annum. Although, increased competition from Lowe’s, concerns the investment community but Home Depot’s new CEO Bob Nardelli is committed to increasing corporation’s profitability by increasing revenue with 15% to 18% growth rate and strategic cost reduction.
2. Case Analysis
For the strategic evaluation of both the companies, analysis on historical and pro forma financial statements are included. Comprehensive financial analysis is conducted while covering both qualitative and quantitative evaluations of companies.
From the analysis of historical financial statements it can be evaluated, how effective has been the management in executing the previously proposed strategies. Whereas the pro forma statements would enable analysts to realize the potential of growth in company operations. Essentially, Carrie is conducting analysis considering investors would be most interested in an opportunity that can procure the highest return with the limited exposure to risk.
Historical Financial Analysis:
The company may have significant potential for growth, particularly due to its international exposure, which its direct competitor still lacks. Whereas, analysis of the financial ratios would provide us the intricacy of the company’s financial standing.