Upload
vodat
View
213
Download
0
Embed Size (px)
Citation preview
DAWEI LIU SEAN CLARK
MAX LIPSCOMB STEPHEN CHEN
STEPHANIE DOWNEY
43%
30%
27% Home Depot!Lowes!other!
• Risk-On Environment!– “Don’t fight the Fed” – QE3!– Free money – 0.25%!– $157 billion Chinese infrastructure
stimulus!• Competitive Advantage!
– Superior supply chain!– Geographic positioning!– First mover advantage!
• Search for Yield!– High dividend stocks outperform in
periods of low economic growth!– Home Depot has higher dividend
yield than three year bond!
RECOMMENDATION: BUY 1YR TARGET: $78.42 (27% UPSIDE)
Source: Bloomberg
INVESTMENT THESIS
US CONSTRUCTION
COMPETITIVE ADVANTAGE FINANCIALS
RISKS AND MITIGANTS CONCLUSION
Home Improvement Retail Marketshare!
0
300
600
900
12/1/06 12/1/07 12/1/08 12/1/09 12/1/10 12/1/11
Rent to Own Gap!
Source: Bloomberg Max Lipscomb!
INVESTMENT THESIS
US CONSTRUCTION
COMPETITIVE ADVANTAGE FINANCIALS
RISKS AND MITIGANTS CONCLUSION
• Upturn in Housing !– Housing starts up 15% in September!– S&P CAPIQ projects 9.8% increase
in residential construction spending in 2012, 16.4% in 2013!
– Architecture billings reaching pre-crash levels!
– Rent to own cost ratio at record lows!– Jamie Dimon: “We believe we have
reached a bottom in the Housing Market.”!
• QE3 Buyback of MBS!– Low yields push investors to equity!– Bank balance sheet cleanup!– Increase mortgage origination!
0
500
1,000
1,500
2,000
2,500
0.00
50.00
100.00
150.00
200.00
250.00
2004 2006 2008 2010 2012 2014 Case-‐Shiller Index Housing Starts
Case-Shiller vs. Housing Starts!
Source: Bloomberg
30
35
40
45
50
55
1/1/08 1/1/09 1/1/10 1/1/11 1/1/12
Source:Bloomberg
Architectural Billings Index!
Max Lipscomb!
INVESTMENT THESIS
US CONSTRUCTION
COMPETITIVE ADVANTAGE FINANCIALS
RISKS AND MITIGANTS CONCLUSION
• Consumer debt to income levels are down 15% from 2008 peak.!– First Gme household debt service raGo below 14 since 1980 – Indicates near end to deleveraging process – With low interest rates, should conGnue to drive increases in mortgages and starts
Stephen Chen!
INVESTMENT THESIS
US CONSTRUCTION
COMPETITIVE ADVANTAGE FINANCIALS
RISKS AND MITIGANTS CONCLUSION
Qualitative Strengths!Lowe’s Failed Sales Policy!• The “Every Day Low Prices policy” !• Lowe’s is suffering from the same
problems as JC Penny!Store Geography!• Present in the economically strong
Northeast!• Lowe’s present in depressed Sunbelt!Better Supply Chain!• Rapid Deployment Centers spur
greater margins !• Fidelitone partnership:!
– ~70% of goods pass through Central Distribution!
• 4.2 inventory turnover vs. industry 2.8!
First Mover Advantage!• Lowe’s over expanded!• HD has first mover advantage!• Lower advertising costs !• Lowe’s fights an uphill battle!
230
240
250
260
270
280
290
300
Lowes Home Depot
Rev/Sq.=. ($MM)
Source: Bloomberg
Dawei Liu!
Quantitative Advantages!Home Depot: !• Last quarter revenue up 1.7%!• same store earnings up 2.1%!• Per Share Profit of $1.01 beat
analyst expectations!• 6 month same store sales number
are up 3.8%!• Higher Current and 10 yr. Avg.
ROE and ROA!Lowe’s:!• Revenue fell 2%!• Missed analysts forecasts of $0.70!• same store sales of -0.4%!
INVESTMENT THESIS
US CONSTRUCTION
COMPETITIVE ADVANTAGE FINANCIALS
RISKS AND MITIGANTS CONCLUSION
35.1% 34.5% 35.3% 41.4%
9.5% 9.5% 6.2%
16.5% 3.7% 5.5% 3.9%
10.4%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
LOW HD LL BBBY
Net Margin
Op. Margin
Gross Margin
HD Margins vs. Competitors!
HD Current ROE- 21.70; LOW- 11.10!HD Current ROA- 9.60; LOW- 5.50!
Source: Bloomberg
Dawei Liu!
INVESTMENT THESIS
US CONSTRUCTION
COMPETITIVE ADVANTAGE FINANCIALS
RISKS AND MITIGANTS CONCLUSION
• Home Depot!– Same store sales of 3.8% in
the first 6 months of the year!– No info on Q3 earnings yet!– Growth:!
• Fastest in consumer goods, tools, bags, flooring, kitchen !
• Slower in professional goods!
• Lowe’s!– Same store sales -0.4%!
-‐4
-‐2
0
2
4
6
8
1/1/10 1/1/11 1/1/12
Lowe's
Home Depot
Same Store Sales Growth !
Dawei Liu!
INVESTMENT THESIS
US CONSTRUCTION
COMPETITIVE ADVANTAGE FINANCIALS
RISKS AND MITIGANTS CONCLUSION
DCF w/ Perpetuity Growth Method!
Key AssumpQons
• Sales growth: 3% • WACC: 8.47% • Terminal MulQple: 11x
Scenario Price
Bear $56.54
Projected $81.26
Bull $104.25
0
20
40
60
80
100
120
10/11/10 10/11/11 10/11/12 10/11/13 10/11/14
68.12% upside
31.04% upside
8.88% downside
Stephanie Downey!
INVESTMENT THESIS
US CONSTRUCTION
COMPETITIVE ADVANTAGE FINANCIALS
RISKS AND MITIGANTS CONCLUSION
• Bull Case ($104.25 --- 68.12% upside)!• Housing market rebounds faster than expected!• Consumer confidence increases!• Home Depot is able to continue to out-position Lowe’s!!
• Base Case ($81.26 --- 31.04% upside)!• Housing market rebounds at expected rate!• Consumer confidence remains steady!• Home Depot loses small ground on Lowe’s!
• Bear Case ($56.54 --- 8.88% downside)!• Housing market reverses!• Consumer confidence decreases!• Lowe’s finds strong competitive advantage against Home Depot!
Stephanie Downey!
INVESTMENT THESIS
US CONSTRUCTION
COMPETITIVE ADVANTAGE FINANCIALS
RISKS AND MITIGANTS CONCLUSION
Share Price Fully Market Enterprise Net
Comparable Companies4 Share Price % of Diluted Value Value1 Debt
EBITDA3 Revenue
Ticker (US$)1 52 week
high1 Shares (FY10)2 10/22/12 10/22/12 10/22/12 LTM1 2012E 2013E LTM1 2012E 2013E
LOWE'S COMPANIES, INC. LOW 32.71 98.3% 1140.6 37,309 44,614 7,305 4858.0 4856.0 5080.2 50883.0 50208.0 50011.5 WILLIAMS-SONOMA, INC. WSM 47.20 98.3% 98.4 4,644 4,316 -328 515.3 512.3 553.7 3827.2 3720.9 4018.6 LUMBER LIQUIDATORS HOLDINGS, INC. LL 50.43 93.4% 27.1 1,364 1,332 -32 66.6 75.8 90.8 744.8 777.8 847.8 THE SHERWIN-WILLIAMS COMPANY SHW 150.60 96.2% 102.6 15,452 16,783 1,331 1073.9 1180.6 1365.0 9264.7 9598.6 10289.5
HOME DEPOT HD 62.04 98.2% 1507.4 93,519 101,517 7,998 8894.0 8343.0 9274.5 71718 70395 73726
Sean Clark!
INVESTMENT THESIS
US CONSTRUCTION
COMPETITIVE ADVANTAGE FINANCIALS
RISKS AND MITIGANTS CONCLUSION
LTM Levered
FCF Yield LT Enterprise value as a multiple of
Comparable Companies Price / Earnings (x) EPS3 PEG (x) = FCF2 = Growt
h Equity Revenue (x) EBITDA (x)
Ticker LTM 2012E 2013E 2011 2012E 2013E
P/E / LTG 2011
(FCF/MCAP
) Rate (%)3 Beta1 LTM 2012E 2013E LTM
2012E 2013E
LOWE'S COMPANIES LOW 23.0 22.9 19.8 1.4 1.43 1.65 1.5 2181.0 5.8% 15.3 0.8 0.9 0.9 0.9 9.2 9.2 8.8 WILLIAMS-SONOMA WSM 20.8 20.8 18.7 2.3 2.27 2.52 1.6 240.3 5.2% 13.2 1.3 1.1 1.2 1.1 8.4 8.4 7.8 LUMBER LIQUIDATORS HOLDINGS, INC. LL 53.1 34.8 28.7 1.0 1.45 1.76 3.1 27.7 2.0% 17.1 1.4 1.8 1.7 1.6 20.0 17.6 14.7 THE SHERWIN-WILLIAMS COMPANY SHW 35.7 23.4 19.4 4.2 6.44 7.77 2.3 674.9 4.4% 15.7 0.6 1.8 1.7 1.6 15.6 14.2 12.3
Mean 33.1 25.5 21.6 2.2 2.90 3.43 2.1 781.0 4.4% 15.3 1.02 1.40 1.38 1.29 13.3 12.4 10.9 Median 29.4 23.1 19.6 1.8 1.86 2.14 1.9 457.6 4.8% 15.5 1.06 1.46 1.44 1.32 12.4 11.7 10.5 High 53.1 34.8 28.7 4.2 6.44 7.77 3.1 2181.0 5.8% 17.1 1.36 1.8 1.7 1.6 20.0 17.6 14.7 Low 20.8 20.8 18.7 1.0 1.43 1.65 1.5 27.7 2.0% 13.2 0.62 0.9 0.9 0.9 8.4 8.4 7.8 HOME DEPOT HD 22.0 24.9 20.8 2.8 2.82 2.98 1.5 5122.0 5.5% 14.5 0.963 1.4 1.4 1.4 11.4 12.2 10.9
<----------------- EPS Multiples ------------------> 24.5 25.0 25.5 26.0 26.5
Implied Share
Price: 68.97 70.38 71.79 73.20 74.61 Sean Clark!
INVESTMENT THESIS
US CONSTRUCTION
COMPETITIVE ADVANTAGE FINANCIALS
RISKS AND MITIGANTS CONCLUSION
1 Year Price Target$78.42!
Comparables Analysis$71.79 !
DCF w/ Perpetuity Growth!$81.26!
70% 30%
Max Lipscomb!
INVESTMENT THESIS
US CONSTRUCTION
COMPETITIVE ADVANTAGE FINANCIALS
RISKS AND MITIGANTS CONCLUSION
• Company Specific Risks!• Shallow economic moat: superior store placement but other factors like supply chain, products and SG&A structure can be imitated!
• Valuation Risks!• 2.5X EV/EBITDA premium to Lowe’s due to higher margins and higher expected growth. Dependent on status of Lowe’s turnaround efforts!
• Macroeconomic Risks!• Possibility that housing market has not bottomed. Since 2007, 4 separate occasions have been declared bottoms!• Further price increases require continual strengthening of home sales!!
• Bottom Line:!• In the short term (≤1 year) competitive advantage is likely safe !• Strength of recent housing data indicates market has likely bottomed out!• In the long term (2+ years) advantage will likely diminish !• Housing growth may slow if employment and wages remain weak!
Stephen Chen!
INVESTMENT THESIS
US CONSTRUCTION
COMPETITIVE ADVANTAGE FINANCIALS
RISKS AND MITIGANTS CONCLUSION
• Catalysts!– Rebound in Housing & Consumption!– Low interest rates !– Favorable rent to own!– Low household debt!– Continued superiority of same store
sales growth!– Continued Supply Chain !
• Stock Movers!– Excess cash of $2.8 bn for share
buyback or dividend increase!– Upward pressure on equities in
response to low interest rates!
RECOMMENDATION: BUY 1YR TARGET: $78.42 (27% UPSIDE)
0
500
1000
1500
2000
2500
3000
2008 2009 2010 2011 2012 Current
Cash on Hand
Home Depot vs. Home Improvement Index!
Source: Bloomberg
0 5 10 15 20 25 30 35 40 45
0
100
200
300
400
500
2006 2007 2008 2009 2010 2011 S5HOMI HD
Max Lipscomb!