Value Line
VALUE LINE PUBLISHING,
OCTOBER 2002
Teaching Note
This case follows the performance-review and financial-statement-forecasting decisions of a Value Line analyst for the retail-building-supply industry in October 2002. The case contrasts the strong operating performance of Home Depot with the strong stock-market performance of Lowe’s. Students examine a financial-ratio analysis for Home Depot that acts as a template to generate a comparable ratio analysis for Lowe’s. The students’ ratio analysis is designed to build intuition with respect to interpreting individual ratios as well as ratio inter-relationships (e.g., the DuPont framework). The historical-performance comparison suggests that investors are skeptical of the ability of Home Depot to maintain its performance trajectory, yet projects sustained improvements for Lowe’s. Students are invited to scrutinize the analyst’s five-year income-statement and asset-side balance-sheet forecast for Home Depot. The case expressly focuses on the asset side of the balance sheet as a preview for other cases using free-cash-flow forecasting. The Home Depot forecast exercise exposes students to the mechanics of financial-statement modeling and sensitivity analysis, which they can use in building their own forecast for Lowe’s. Finally, the strong-growth assumptions for Home Depot relative to the modest-growth forecast for the industry suggest that the company is expected to capture massive and perhaps unreasonable market share in the near term. The exercise provides a striking example of the importance of comparing bottoms-up business forecasting with top-down industry forecasts.
The case may be used to develop any of the following teaching objectives:
1. Explore financial-statement and financial-ratio analysis.
2. Review basics of financial forecasting as a platform for cash-flow forecasting. Build consideration of internal consistency of forecasting with respect to industry, peer, and
OCTOBER 2002
Teaching Note
This case follows the performance-review and financial-statement-forecasting decisions of a Value Line analyst for the retail-building-supply industry in October 2002. The case contrasts the strong operating performance of Home Depot with the strong stock-market performance of Lowe’s. Students examine a financial-ratio analysis for Home Depot that acts as a template to generate a comparable ratio analysis for Lowe’s. The students’ ratio analysis is designed to build intuition with respect to interpreting individual ratios as well as ratio inter-relationships (e.g., the DuPont framework). The historical-performance comparison suggests that investors are skeptical of the ability of Home Depot to maintain its performance trajectory, yet projects sustained improvements for Lowe’s. Students are invited to scrutinize the analyst’s five-year income-statement and asset-side balance-sheet forecast for Home Depot. The case expressly focuses on the asset side of the balance sheet as a preview for other cases using free-cash-flow forecasting. The Home Depot forecast exercise exposes students to the mechanics of financial-statement modeling and sensitivity analysis, which they can use in building their own forecast for Lowe’s. Finally, the strong-growth assumptions for Home Depot relative to the modest-growth forecast for the industry suggest that the company is expected to capture massive and perhaps unreasonable market share in the near term. The exercise provides a striking example of the importance of comparing bottoms-up business forecasting with top-down industry forecasts.
The case may be used to develop any of the following teaching objectives:
1. Explore financial-statement and financial-ratio analysis.
2. Review basics of financial forecasting as a platform for cash-flow forecasting. Build consideration of internal consistency of forecasting with respect to industry, peer, and