VALUE LINE SUBMITTING,
This case uses the performance-review and financial-statement-forecasting decisions of a Value Line analyst intended for the retail-building-supply industry in October 2002. The case contrasts the solid operating overall performance of Residence Depot with all the strong stock-market performance of Lowe's. Learners examine a financial-ratio research for Home Depot that provides for a template to have a comparable ratio analysis for Lowe's. The students' ratio analysis is made to build intuition with respect to interpretation individual ratios as well as proportion inter-relationships (e. g., the DuPont framework). The historical-performance comparison suggests that investors will be skeptical in the ability of Home Depot to maintain it is performance flight, yet jobs sustained advancements for Lowe's. Students will be invited to scrutinize the analyst's five-year income-statement and asset-side balance-sheet forecast for property Depot. The case expressly is targeted on the advantage side in the balance sheet like a preview for other cases using free-cash-flow forecasting. The Home Depot forecast exercise exposes students to the technicians of financial-statement modeling and sensitivity research, which they are able to use in building their own prediction for Lowe's. Finally, the strong-growth presumptions for Home Depot relative to the modest-growth prediction for the industry suggest that the company is usually expected to record massive and maybe unreasonable business in the around term. The exercise provides a striking sort of the importance of comparing bottoms-up business forecasting with top-down industry forecasts.
The case may be used to develop one of the following instructing objectives:
1 ) Explore financial-statement and financial-ratio analysis.
2 . Assessment basics of economic forecasting as being a platform intended for cash-flow forecasting. Build consideration of inside consistency of forecasting regarding industry, peer, and own-firm comparisons.
several. Investigate forecast-sensitivity analysis and value individuals.
4. Prepare students to get thoughtful cash-flow forecasting inside the context of capital budgeting and purchase valuation.
1 . So what do the economic ratios just in case Exhibit several tell you about the operating efficiency ofHome Depot? What details do the distinct ratios present? Complete and compare a similar analysis for Lowe's.
2 . How sensitive can be return upon capital to the forecast assumptions in case Display 8? What independent within Carrie Galeotafiore's estimates must drive the 2002 return-on-capital estimate listed below Home Depot's cost-of-capital approximate of doze. 3 percent? Look specifically at major margin, funds operating expenditures, receivable turnover, inventory yield, and P& E proceeds. What result does sales growth possess on come back on capital? Explain your findings.
three or more. Do you believe Galeotafiore's outlook for Home Depot? How do you adjust this?
4. Just how would your forecast presumptions differ intended for Lowe's? Full and advise a five-year Lowe's prediction to Galeotafiore.
This summarize assumes by least a 110-minute course period. For shorter category periods or if the students are beginners at predicting, the instructor may possibly decide to never ask pupils to do the Lowe's forecast (Study Issue 4).
1 ) Who warrants the " management in the yearвЂќ prize in the retail-building-supply industry?
The trainer may begin simply by asking which usually manager in the retail-building-supply sector (Lowe's or Home Depot) deserves the 2001 " management with the yearвЂќ merit. The focus of this question is always to contrast the strong traditional operating performance of Home Depot while using strong stock-market performance of Lowe's.
You start with the return-on-capital figures, the instructor can probe views on the operating achievement of each company. Using the ratios from 2001: