Home Depot (HD) needs new blood
The year 2006 could very well be remembered as the year of leverage buyouts. The private equity
firms appear to be on a mission to take over under performing companies. For example, In September, Freescale Semiconductor (FSL) agreed to sell for $17.6 billion. The deal was almost 25% more than FSL’s value at that time. This morning, there are reports KKR and Texas Pacific is kicking Home Depot’s tires. Home Depot’s stock jumped approximately 5% on the news. As I am writing this, the stock is trading at $39.18/share, an increase of 3.19%.
Looking deeper at Home Depot, one will find a company that holds a virtual monopoly in the home improvement business. When I consider home improvement, the first store that comes to mind is Home Depot. For this reason, the company holds a consumer monopoly; similar to how we equate fast food with McDonald’s (MCD). Home Depot’s only competitor is Lowe’s. Besides Lowe’s, I see no other retailer in the same space. Sure, you can find some of the same items at Wal-Mart, Sears and etc, but the selection that Home Depot provides is second to none.
In my view, the biggest problem with Home Depot is management. The current management team needs to go. They have failed to realize customer service is the key and have done nothing to adjust their strategy to the declining housing slump. When Mr. Nardelli first joined Home Depot, he managed to improve the level of customer service from his predecessor. However, for some reason, Home Depot has decided to abandon its efforts to improve in this area. On the flip side, Lowe’s realize customer service is a differentiator. The strategy is working well for Lowe’s. Home Depot needs new blood and new perspective. The only way to do that is to rid itself of its current management team.
If the leverage buyout does happen, and I am hoping it does, Home Depot would be better off with a new management team. With $100 billion market value, Home Depot would be worth about $45/share. Although the stock jumped this morning, there are still opportunities to at the current price. My recommendation is to buy a small position, sit back and see what develops. Best of luck!
