Home Depot business model and operations

Home Depot

In order to answer the main question of the price to be paid within one year time for 100 shares of the company, it is important to know the price of one share at that point of time based upon the past performance of the shares and its' expected movements. If compared the price and performance of the Home Depot shares since 1984, which is the time since when the sahres were actively traded on the market, with the performance of the Standard & Poors index, the shares sometimes were outperforming the market while sometimes were underperforming.

Simplistic examination of the chart of the perfromance of the shares compared with the index perfomance can leas us to the conclusion that the company beta is greater than zero and in case of further positive market performance and strengthening investment opportunities, the company is expected to be doing well which will translate into good shares performance. For the last five years the dividends paid out to the shareholders were also increasing, and the expected dividends to be paid out in the next year are at the rate of $0,15 per one share, which equals to about $0,45 of annual dividends.

According to the simple Dividend Discount Model, as the majority of the investors are knowledgable and can read the market efficiently, the present price of the share equals to the sum of the dividend and capital yield discounted by the expected rate of return for the shares of the same risk which can be considered as opportunity costs of holding the capital in Home Depot shares.

P0 = DIV1+ P1 / (1 + r)

Since 1984 the price of the sahres has risen from $0,31 up to $41,36 during the previous days. Expected daily return on the sahres, or variations in the share prices since 2000 is 0,004%r or 1,45,% annual return, while expected (average for the previous 21 yearsm since 1990) return on annual basis, which equals share appreciation plus dividend yield, amounted to about 30%. So, the long-term share holders have experienced much higher yields than investors that are middle to short-term shareholders within this company.

So, we can expect the price in the one year time to be about $42-43 per one share in case of no external or internal to economy shocks and continuing steady positive movements of the market. This is not big increase in share price compared to some growth companies who are plowing back much of their earnigns now and thus paying out smaller dividends but whose high present share prices reflect positive future opportunities while we can consider that the major growth for this comapny is already in the past and the share investment is rather stable. Analysts expect that one year prices for this stock will be at the range of $47 dollars and forward price-earnigns ratio to fall to 13,8 which reflects increases in prices over short-term, while earnigns shall not increase significantly, while future mid-term earnigns increase expectations.

The stock price is not prone to major wild up and down swings and it is moving in general together with the market, outperforming or underperforming it. But minor variatoins in the stock prices do occur on seasonal and other economic related basis. Average standard deviation, which is the measure of security risk, on daily basis for the last five years was 2,53% which is not the worst case for the market. The biggest downward swing for the security was in January, 2003 when the market was down also. After that, in January, 2005 the price was again high after which there was a relatively low reduciton in the price but the fact that the company is continuing to pay out higher and higher dividends together wiht other stable financial performnace measures reflects the fact that the company is healthy and the shares should be performing well. For the past several weeks the price of the shares was reducing slightly together with downward movement of the market which we believe is due to seasonal minor variations.

Nine of ten analysts on Yahoo Finance are strongly advicing to purchase the shares or for the holders to be continuing holding them which can be a proxy measure for investment decision before going into deep company performance and strategy analysis.

The interest rate that could be generated for a risk-averse investor, thus, interest rate paid by the banks on savings accounts or certificates of deposit, varied from 4% up to 6%

which is much lower than the one that could be generated from investing into the shares. But the risks are much higher for the share investors and thus the risk-adjusted returns must be considered in order to arrive at optimal for investor decision. I am not a very risk-averse person and I would not forgoe stable interest on my savings account or certificate of deposit in order to invest money into shares. But as a profit seekrer, I would diversify my savings and invest some part of it into shares. Having set my risk preferences, I would screen the shares in order to arrive at optimal for me portfolio and I should invest into Home Depot. As the interest rates provided by the banks on rather safe investments are not as high as opportunities for players on stock markets, and also considering my risky nature, I would be willing to pay more for equity future today that I believe is promising annual return which I do not consider to be the fact for Home Depot.

On the other hand, as more patient people tend to prefer long-term promising investments rather than short-term but lower yielding investment, the latter would not consider Home Depot as an opportunity for them, while the former may do so. I would construct my portfolio from investing into savings account with stable return, and dividing the rest between very risky with high promising short-term results stocks and put in some part into Home Depot which I consider stock with higher returns in longer future. But if after having examined the stock opportunities, I would have found more promising short-term investment opportunities, I would choose them rather than Home Depot. The dividend discount model also states that the present value of the stock reflects not only one year expectations, but several years expeations and the price is equal in the present time for all. If the expected in the near future return is rather low comparing to other stock and safe investment opportunities, but the price of the share is rather stable and is increasing, also, other indicators are positive, this can signal of very positive middle-term opportunities and may be some inside information availalbe for the players on the market reveals that the comapny has some very good yield mid-term projects which drives up the value of the stock in the today market.