Wednesday, December 20, 2006

Home Depot, Again: Leon Cooperman's "Powerful Numbers"

Yesterday afternoon, Maria Bartiromo interviewed Omega Fund founder CEO, Leon Cooperman, by telephone, on CNBC. The "video," with Cooperman's audio, can be viewed here.

I must admit that I found the 'interview' to be rather unusual. Rather than have Cooperman interact, on camera or via microphones, with one Ralph Whitworth, another institutional investor who is assailing Home Depot's board and management for ineptitude, Bartiromo/CNBC chose to simply refer to Whitworth, show a video clip of an earlier interview with him, and then present Cooperman live, alone. She opened the piece by citing Omega's 5 1/4 B of assets under management, and its position of 2.5MM shares of HD. The nature of the introduction seemed calculated to confer some sort of infallibility on Cooperman and his investing choices.

Could Lee be 'pumping' Home Depot, with CNBC's help? Or, at the least, defending it?

Let me be very clear here. I am not saying that Cooperman, Bartiromo, or CNBC did anything illegal. Omega's beneficial interest in Home Depot was explicitly stated at the beginning of the interview. However, it is indisputable that CNBC had Cooperman appear in order to tout a stock in which his fund has a fairly large position. Further, they had him on after another investor who had made pointed allegations of board and managerial failures to perform.

Cooperman went on to list a set of reasons to risk your capital on HD. He gave testimonials on Nardelli, via Jack Welch, Nardelli's one-time manager at GE, on Welch himself, and on two directors of HD. Fine. But, where's the beef?

Maria said, in agreement with Cooperman, of Nardelli's operating record,

"the numbers are powerful....revenues, earnings.....powerful under Nardelli....no doubt about it."

Really? Look at the chart on the left, displaying the performance of sales, NIAT, and total return for Home Depot and Lowes since 2000. You may click on the chart, and on the subsequent stock price charts, to view larger versions of all of them.

Sales growth has finally accelerated again at HD in the last twelve months, but it still lags that of its major competitor, Lowes. Net Income Available after Taxes, up 9% for the past twelve months, is the lowest increase since the first full year under Nardelli. And, again, it lags Lowes by more than twofold.

Powerful performance, eh, Bob...Maria....Lee? I just don't see it. I didn't see it,
here, or here, either, in my posts on this topic back in July of this year.

Cooperman went on to list a series of rapid-fire 'data' about Home Depot. Its real estate position has increased. Dividends and earnings up over a short period of time. The company bought stock back. So what? These are intermediate activities which are not having an effect on the firm's stock price. That Lee Cooperman thinks they should is beside the point, isn't it? Unless his personal opinion is supposed to be sufficient reason to buy the stock. Which would be nice for him, since his fund, remember, already owns 2.5MM shares of Home Depot.

Cooperman clearly believes, as a result of his fund's analytical team's meetings with HD's management, that the company's stock will eventually be appreciated, even though, now, it's "undervalued." His reeling off of the many operating statistics, mostly rather abstruse numbers, sounded like he was reading from a list his analysts had prepared for him.


Specifically, it reminds me of my own experiences in corporate America. The staffers build a set of numbers and talking points so that the senior executive, who is not as well-versed on the topic, can rattle off seemingly-unassailable numbers. Do you think any of the carefully-selected data presented by Cooperman, on behalf of his analysts, will be negative or cast doubt on Home Depot's 'powerful' operating results? Unlikely.


To get a better picture, here's a Yahoo-sourced chart of stock prices for Home Depot and Lowes, plus the S&P500 Index, for the past five years. Lowes is clearly superior, and HD can't even outperform the S&P. Despite Cooperman's plea that the firm is simply misunderstood, the market



For a little more perspective, here's a chart of the same data for a much longer timeframe. It's clear that, since 2000, things have never been as good for Home Depot as they were before then. Nothing that Nardelli has done for six years has succeeded in improving the company's total return to beat that of the S&P500.

Meanwhile, Lowes' stock price has continued to rise steadily, though not, apparently, much faster than the index since around 2001.


The only basis on which I saw improvement in HD's stock was in the last three months. Blogger is not cooperating with my attempts to paste a stock price chart. However, Yahoo's charts shows that, over the past 90 days, HD has outperformed Lowes, roughly 9% vs. flat, but still underperformed the S&P.

Of course, if Cooperman's premise is that you have to catch the right 3-6 month period in order to earn superior returns in Home Depot, I don't think that's going to help most investors. It sounds more like investing on technical indicators, and hopes of a short-term "pop" from some transitory fundamentals in the near future, then correctly timing your exit from the position.

However, in terms of long-term, consistent performance, Home Depot does not appear to have improved since my analysis in July of this year. And, on a comparative basis, it does not seem to be performing "powerfully" at all, Maria Bartiromo's and Leon Cooperman's contentions to the contrary. I attempt to present the data on which I base my assessments whenever I critique a company's performance. For me, the Cooperman interview on CNBC, and Bartiromo's and Cooperman's statements claiming great fundamental performance for Home Depot, seem empty without clear, written or graphic evidence to substantiate them.

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