• Skip to content
  • Skip to primary sidebar

Right Attitudes

Ideas for Impact

Home Depot Stock Underperformance: Who’s to Blame?

January 5, 2007 By Nagesh Belludi Leave a Comment

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.

Home Depot Stock Underperformance: Who is to Blame?

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.

Filed Under: Business Stories, News Analysis

Reader Interactions

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Primary Sidebar

Popular Now

Anxiety Assertiveness Attitudes Balance Biases Coaching Conflict Conversations Creativity Critical Thinking Decision-Making Discipline Emotions Entrepreneurs Etiquette Feedback Getting Along Getting Things Done Goals Great Manager Leadership Leadership Lessons Likeability Mental Models Mentoring Mindfulness Motivation Networking Parables Perfectionism Performance Management Persuasion Philosophy Problem Solving Procrastination Relationships Simple Living Social Skills Stress Suffering Thinking Tools Thought Process Time Management Winning on the Job Wisdom

About: Nagesh Belludi [hire] is a St. Petersburg, Florida-based freethinker, investor, and leadership coach. He specializes in helping executives and companies ensure that the overall quality of their decision-making benefits isn’t compromised by a lack of a big-picture understanding.

Get Updates

Signup for emails

Subscribe via RSS

Contact Nagesh Belludi

RECOMMENDED BOOK:
Liminal Thinking

Liminal Thinking: Dave Gray

Strategic design consultant Dave Gray manual on addressing complex challenges by recognizing ignorance, seeking understanding, and creating positive change.

Explore

  • Announcements
  • Belief and Spirituality
  • Business Stories
  • Career Development
  • Effective Communication
  • Great Personalities
  • Health and Well-being
  • Ideas and Insights
  • Inspirational Quotations
  • Leadership
  • Leadership Reading
  • Leading Teams
  • Living the Good Life
  • Managing Business Functions
  • Managing People
  • MBA in a Nutshell
  • Mental Models
  • News Analysis
  • Personal Finance
  • Podcasts
  • Project Management
  • Proverbs & Maxims
  • Sharpening Your Skills
  • The Great Innovators

Recently,

  • Did School Turn You Into a Procrastinator?
  • Inspirational Quotations #1101
  • Luck Doesn’t Just Happen
  • The Speed Trap: How Extreme Pressure Stifles Creativity
  • Inspirational Quotations #1100
  • Airline Safety Videos: From Dull Briefings to Dynamic Ad Platforms
  • How Small Talk in Italy Changed My Perspective on Talking to Strangers

Unless otherwise stated in the individual document, the works above are © Nagesh Belludi under a Creative Commons BY-NC-ND license. You may quote, copy and share them freely, as long as you link back to RightAttitudes.com, don't make money with them, and don't modify the content. Enjoy!