Abstract:

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 for generating a comparable ratio analysis for Lowe's. The student ratio analysis is
designed to build intuition with respect to interpreting individual ratios as well as ratio
interrelationships (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 they project 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 stronggrowth assumptions for Home Depot relative to the modest-growth forecast for the industry
suggest that the company can be expected to capture massive and perhaps unreasonable
market share in the near term. The exercise provides a striking example of the importance of
comparing bottom-up business forecasting with top-down industry forecasts. The case may
be used to develop any of the following teaching objectives: (1) exploring financialstatement and financial-ratio analysis; (2) reviewing the basics of financial forecasting as a
platform for cash-flow forecasting, and building consideration of internal consistency of
forecasting with respect to industry, peer, and own-firm comparisons; (3) investigating
forecast-sensitivity analysis and value drivers; and (4) preparing students for thoughtful
cash-flow forecasting in the context of capital budgeting and acquisition valuation.
Number of Pages in PDF File: 13
Keywords: financial ratios, financial-statement analysis, forecasting, investment analysis, security
analysis, sensitivity analysis
JEL Classification:
Case and Teaching Paper Series