Right Attitudes » Ideas for Impact » by Nagesh Belludi

Home Depot Chairman and CEO Robert Nardelli resigned on Wednesday. Since early 2006, Nardelli had been under a fair amount of criticism from investors primarily for disproportionate compensation and poor performance of Home Depot’s stock [HD].

In May of last year, the New York Times estimated that Nardelli had received compensation worth $245 million during the first five years of heading the company. During this time, Home Depot’s stock had slid some. The stock performance was especially poor when compared to that of Home Depot’s archrival, Lowe’s [LOW].

Is the company management completely at fault for the fact that the share price has gone nowhere in the last six years? After all, during Nardelli’s tenure, Dec-2000 to Jan-2007, Home Depot’s has grown significantly and profit margins have improved. Here are key numbers (2007 data are Wall Street consensus estimates for the financial year ending 31-Jan-2007.)

• Revenues increased from 45.7 billion to 91.0 billion, an increase of 100%
• Net income increased from 2.6 billion to 6.2 billion, an increase of 140%
• Earning per share (EPS) increased from $1.10 to $2.95, an increase of 170%
• Dividends (per share) increased from $0.16 to $0.90, an increase of 460%

Lesson for Investors: Perspective in Valuation

During the late eighties and nineties, Home Depot grew exponentially under the leadership of its founders. Naturally, its stock was very popular on Wall Street and attracted rich valuations. The Price to Earning ratio (P/E) of the stock was high; so was the PEG ratio (the ratio of P/E to growth rate). Investors ‘bought high’ and ’sold high’ during this period: they purchased at rich valuations and sold at rich valuations, as with any other growth stock.

After Nardelli assumed leadership of the company in December 2000, investors continued to expect richer valuations. In the post-bubble period, Home Depot’s stock lost its sheen; it lost the rich valuations it once attracted. Its P/E ratio was now comparable to that of mature companies. Further, stocks of large, blue chip companies (GE, Intel, Microsoft, Wal-Mart, Citigroup, Pfizer, etc.) went out of favor on Wall Street from year 2001. Despite impressive earnings growths, these companies have suffered from decreased interest in their stocks (see story and chart on Business Week’s cover story and accompanying chart from April 2006.)

Investors often have undue expectations of stock prices of rapid-growth companies and lack perspective on stock valuations as such companies mature.

*Keyword(s): Home Depot, Blue-chips, Wall Street, stock valuations, investing

A senior colleague at work recently mentioned that Procter and Gamble [PG] recruited his daughter as a management trainee. She would work at the corporate headquarters in downtown Cincinnati, Ohio. He said, “She interviewed at General Electric [GE] and got rejected in the last round of interviews. She was very disappointed; GE was her top choice.”

General Electric’s management practices and vast managerial talent are widely recognized as one of the world’s best. Its leadership development program and the John F. Welch Leadership Center at Crotonville, New York state, receive wide publicity, especially in the print media.

Procter and Gamble is equally well known as one of the best breeding grounds for managers. Its reputation for hiring the best young talent, training them rigorously, and challenging them with opportunities in marketing, product strategy and operations is legendary.

“Many CEOs and top managers in corporate America are Procter and Gamble alumni,” I explained to my colleague that his daughter out to be thrilled she joined Procter and Gamble. “So, she has a chance, haan?” replied my colleague, ending the conversation.

Procter and Gamble Alumni

From memory, I compiled a list of current corporate leaders that, at some point in their careers, worked at Procter and Gamble. Here it is for your reference.

• Jeffrey Immelt, CEO, General Electric
• Steven Ballmer, CEO, Microsoft
• Steve Case, former CEO, America Online (AOL)
• James McNerney, CEO, Boeing
• Margaret Whitman, CEO, eBay
• Stephen Sanger, Chairman and CEO, General Mills
• Crispin Davis, CEO, Reed Elsevier
• Scott Cook, CEO, Intuit (Quickbooks, etc.)
• Michael Szymanczyk, Chairman and CEO, Philip Morris USA
• Paul R. Charron, Chairman, Liz Claiborne
• Bernd Beetz, CEO, Coty
• James Orr, CEO, Convergys

*Keyword(s): Procter and Gamble, General Electric, leadership development, management training

Last month, an Airbus A380 aircraft completed crosswind performance trials at an airport in Ireland.

A crosswind condition occurs when a wind blows across the direction of travel. A crosswind-landing condition occurs when a large vector (component) of the prevailing wind is perpendicular to the runway centerline. By construction, the aircraft drifts into the wind direction. Under such situations, pilots are faced with the challenge of maneuvering the aircraft’s speed and direction to align with the runway upon touch down. See the Wikipedia article on crosswind landings for more details.

Aircraft manufacturers perform a series of crosswind performance trials to demonstrate the capabilities of their aircrafts and publish crosswind limits. Consider the following crosswind landing videos from YouTube.

Crosswind trials of the Airbus A380-800 [http://www.youtube.com/watch?v=GHrLB_mlir4]

Crosswind trials of the Boeing 777-200 and the Boeing 747-SP [http://www.youtube.com/watch?v=KewDaYDG1i0]

Crosswind landing attempt of an Airbus A321-200 [http://www.youtube.com/watch?v=J0HynFr4LrA]

Amazing. The videos illustrate just how challenging flying is: a combination of skill, calculation and practice. Makes mankind, particularly us, engineers, proud of our achievements.

*Keyword(s): Airbus, Boeing, airliners, great products

Today, the day after Thanksgiving, marks the first day of the holiday shopping season. The retailing industry terms this day ‘Black Friday’.

In theory, stores expect to switch from losses (accounted for in red color in financial statements) to profits (accounted for in black color.) Stores, big and small, offer hefty discounts and attractive promotions to lure shoppers. Consequently, Black Friday is one of the busiest shopping days of the year.

• Stores open as early as 5:00am and publicize low-ticket items to attract shoppers. Often, stores carry limited quantities of deeply discounted items. Thus, shoppers scramble to enter the stores and fight to lay their hands on these items. See interesting news stories of shoppers fighting for bargains here, here and here.
• Most stores offer discounts for only a few hours in the morning. For instance, today, Wal-Mart’s discounts were limited to 5a.m. to 11a.m. Shoppers transit from store to store and families split-up to reach various stores before discounts terminate.
• Stores hope that once shoppers are tempted to start the day at their stores, they will buy less-discounted and regular merchandise. Clearly, they risk margins in an effort to boost sales numbers, one of the key metrics in the retailing industry.
• In 2004, Wal-Mart decided to scale down on Black Friday offers in an effort to increase margins. Sales were poor; Wal-Mart stock dropped 4% the day it announced poor sales figures.
• This year, major retailers including Wal-Mart [WMT] and Target [TGT] reported weaker-than-expected sales numbers for October. Wal-Mart announced just 0.5 percent increase in same-store sales for October; these numbers were short of the 2 to 4 percent increase that it had initially expected. Consequently, Wal-Mart announced aggressive discounts on a wide-range of goods including consumer electronics.

As I hopped from store to store hunting for bargains and gifts this morning, I ignored a few questions the investor in me had: Do Black Friday promotions pull sales from later in the shopping season? How many customers return goods they purchased on Black Friday? If a retailer fails to capitalize on the Black Friday craze, can it make up during the rest of the shopping season? Are sales numbers more important than margins?

*Keyword(s): Consumerism, retailing, shopping, Wal-Mart, Target