TDW: Financial Analysis through March 2008 (Update)

We previously posted an analysis of Tidewater's preliminary financial results for the quarter and fiscal year that ended on 31 March 2008.

Tidewater Inc. (TDW) owns "the world’s largest fleet of vessels serving the global offshore energy industry." The company has grown beyond its home base in the Gulf of Mexico to such an extent that international operations contributed 84 percent of Tidewater's Revenue in fiscal 2008. To continue this growth, Tidewater is substantially expanding and modernizing its fleet with annual investments between $300 million and $500 million.

Despite the capital investment program, Tidewater management was recently confident enough in its current and future cash flows to raise its dividend by 67 percent. This was the first dividend increase in more than a decade.

Tidewater has now submitted a complete annual report in a 10-K filed with the SEC. We have updated our analysis to incorporate the latest data. The additional data in the 10-K did not change The GCFR gauge scores. The Overall gauge remains at a modest 43 out of 100 possible points, as shown below. For details, please see the earlier post.

• Cash Management: 11 of 25
• Growth: 10 of 25
  
• Profitability: 4 of 25
  
• Value: 16 of 25
  

• Overall: 43 of 100
  

The data in the 10-K didn't change our examination of Tidewater's March 2008 quarterly Income Statement, which was included here.


A few tidbits from the Notes to the Financial Statements in the 10-K.

1. In the last three years, the percentage of pre-tax earnings derived from operations in the U.S. declined from 39 percent to 26 percent to 3 percent.

2. The high proportion of foreign income greatly reduces the company's U.S. tax liabilities below the U.S. federal statutory tax rate of 35 percent. The effective tax rate in the last three fiscal years declined from 27 percent to 21 percent to 18 percent.

3. The company's U.S. defined-benefit and supplemental pension plans and its post-retirement benefit plans are, in the aggregate, underfunded by $32 million. This amount is recognized on as a liability on the Balance Sheet.

4. Between July 2007 and March 2008, Tidewater repurchased $196 million worth of its common shares, at an average price per share of $54.76. The company was authorized to spend another $54 million on its shares, and it did so by 15 May 2008. The reduction in the number of shares outstanding can increase earnings per share.

5. Tidewater has made commitments to purchase 49 new vessels for a total cost of $960 million. These vessels are scheduled for delivery at various times over the next four years. On 31 March 2008, the company has 440 vessels, of which 367 were in active service. Management has signaled its interest in enhancing efforts to replace older vessels with "fewer, larger and more efficient" ones.

6. The company expects to be able to obtain the funds needed for fleet replacement, despite current conditions in the credit markets, "although the terms and pricing of such capital or borrowings may be on terms that are not as advantageous as the company has enjoyed historically."

7. As previously reported, the company is investigating, with the aid of a special counsel, compliance with the U.S. Foreign Corrupt Practices Act (FCPA). The initial investigation focused on operations in Nigeria, but then expanded to various other countries. The special counsel reported its findings to the company's audit committee this month. The Justice Department and the SEC have been, or will be, advised of the findings, and these agencies have requested related documentation. The company hasn't yet made any provisions for the liabilities that might result from enforcement actions because it hasn't concluded that the liabilities are "probable and reasonably estimable."

8. The company has redeployed some vessels from Nigeria to other parts of West Africa, in response to difficulties in getting and renewing operating permits. Nigeria can be a risky place to operate.

NOK: Look Ahead to June 2008 Results

Our analysis of Nokia through March 2008 determined that the Overall gauge increased from 28 to 37 points, out of 100 possible points. The Growth and Profitability gauge scores were solid, at 14 to 15 points each, and the double-weighted Value gauge showed some signs of life by rising from 1 to 5 points, a still weak result given that 25 points is the maximum score for this gauge.

The Value gauge was soft because the price of Nokia ADRs advanced from $20.32 to $38.39, a gain of 89 percent, in 2007. The weak dollar undoubtedly added to the ADR price rise. Revenue and Net Income grew smartly in 2007, but they they were outpaced by the soaring stock price. The ADRs weakened somewhat in early 2008, which, from our point of view, made the company a tad more attractive.

Nokia Corp. (NOK), headquartered in Espoo, Finland, is a global seller of cellular phones and the equipment for mobile phone networks. In April 2007, the company and Siemens formed Nokia Siemens Networks, a 50/50 partnership. The June 2008 quarter will be the first one that includes comparable results for NokiaSiemens, with its annual sales of €13.4 billion, in both the current and year-earlier periods. In the previous four quarters, the financial statements were not strictly comparable with historical results.

Nokia will reports its results for 2008's second quarter on 17 July. In anticipation of this report, we've modeled Nokia's Income Statement for the quarter. The intent of this exercise was to produce a baseline for identifying any deviations, positive or negative, in the actual data. GCFR estimates are derived from trends in the company's historical financial results and guidance provided by company management.

The company, in April, provided some qualitative guidance about expected business conditions and anticipated sales volumes.

Given the strong Revenue growth Nokia has been achieving recently, we can expect Revenue in the second quarter to be greater than the €12.6 billion figure in the June 2007 quarter. However, the earlier period was particularly strong, so we would expect some moderation of the growth rate. With this in mind, our working estimate for second quarter Revenue is €13.2 billion. This value is only 5 percent greater than year-earlier Revenue, but it equates to year-over-year Revenue growth of 23 percent. Professional analysts are a little less optimistic: their average estimate for Nokia's first quarter Revenue is $20.1 billion (€13.0 billion at the current exchange rate ).

Nokia's Gross Margin has been 31 to 36 percent of Revenue in each quarter for the last couple of years. But, it has been at the high end of the range recently. This leads us to believe that 35 percent is achievable in the second quarter. Therefore, our expectation for Costs of Goods Sold in the quarter is (1 - 0.35) * €13.2 billion = €8.6 billion.

Research and Development and Sales, General and Administrative expenses have each been between 10 and 11 percent of Revenue recently. We will assume the higher figure and estimate each of these expense at 0.11 * €13.2 billion = €1.5 billion.

In the June 2007 quarter, net other Operating Income was a monumental €1.8 billion. However, this was entirely due to the formation of NokiaSiemens Networks. We have no reason to believe there will be extraordinary income or expenses in the June 2008 quarter.

With these figures, our estimate for Operating Income works out to be €1.7 billion.

Investment and interest income/expenses are tough to predict because they vary greatly from quarter to quarter. For the record, we're assuming €75 million net non-operating income. If we subtract €490 million for income taxes, assuming an effective 27.5 percent tax rate, the prediction for Net Income is €1.3 billion (€0.34/share). The analyst consensus estimate is $0.57 (€0.37) per share.

(€M)		March 2008 (predicted)	March 2007 (actual)
Revenue		13200	12587
Op expenses
	CGS	(8580)	(8671)
	R&D	(1452)	(1716)
	SG&A	(1452)	(1669)
	Other	0	(1828)
Operating Income		1716	2359
Other income
	Investments	10	453
	Interest, etc.	65	60
Pretax income		1791	2872
Income tax		(493)	(44)
Net Income		1299	2828
		€0.34/sh	0.72/sh
Shares outstanding		3850	3946

MSFT: Look Ahead to June 2008 Results

Our analysis of Microsoft's March 2008 quarter found that the Overall Gauge score increased 6 points to a very good 58 out of 100 points. This result, the highest since June 2006, was boosted by a 20-point score, of 25 possible, on the Growth gauge and 15 points each on the Profitability and Value gauges.

We cautioned that one-time events during the quarter, such as legal settlements, tax rate changes, and gains on derivatives, had a significant effect on earnings.

Microsoft Corp. (MSFT), the gigantic developer of operating system and application software, also sells video game consoles, music players, and computer peripherals. Microsoft is determined to be a major player in the online advertising business, in direct competition with Google Inc. (GOOG); however, its proposed $40+ billion acquisition of Yahoo! Inc. (YHOO) was unsuccessful.

The price of Microsoft shares lost ground in early February when the Yahoo! bid became public. The share price didn't fully bounce back after the offer was withdrawn in May, perhaps because Carl Icahn soon began to push Yahoo to revive take-over talks.

Microsoft will reports its results for the quarter and fiscal year ending 30 June 2008 on 17 July. In anticipation of this report, we've modeled Microsoft's Income Statement for the June quarter. The intent of this exercise was to produce a baseline for identifying any deviations, positive or negative, in the actual data. GCFR estimates are derived from trends in the company's historical financial results and guidance provided by company management.

Management guidance for the June 2008 quarter was included in the press release reporting the results of Microsoft's March quarter.

The company forecast that Revenue in the June quarter would be in the range of $15.5 to $15.8 billion. The mid-point, $15.65 billion, which is the figure we will use, is 17.0 percent higher than Revenue in the June 2007 quarter. On a year-over-year basis (i.e., trailing four quarters compared to the four previous quarters), Microsoft's Revenue growth would be 18 percent if sales in the June quarter match the guidance.

Microsoft's Gross Margin is typically around 80 percent (!). In the year-earlier quarter, the margin was unusually low at 75.8 percent because the company recorded a $1 billion charge to repair faulty Xbox games. We're going to be assume normal conditions apply and set our Gross Margin expectations for the June 2008 quarter at 82 percent. This ratio translates into a Cost of Goods Sold of (1 - 0.82) * $15.65 billion, or $2.8 billion.

Given where Microsoft is in its product development cycle, it's not surprising that R&D expenses, as a percentage of Revenue, have edged down a couple of percentage points towards 13 percent. However, there was an uptick in the March quarter. We will assume 13.5 percent, or $2.1 billion, for R&D expenses in the June quarter.

SG&A expenses are more volatile, but they have recently been about 30 percent of Revenue. The costs of the Yahoo bid could push SG&A expenses even higher. At 30 percent, June's SG&A expenses would equate to 0.30 * $15.65 billion = $4.7 billion.

These estimates yield an estimated Operating Income of $6.0 billion, right in the middle of the $5.8 to $6.2 billion range indicated in Microsoft's guidance.

Investment and interest income has recently been between $300 and $400 million per quarter. We'll assume net Non-operating income of $350 million. This would lead to Pre-Tax Income of almost $6.4 billion.

We'll also assume an income tax rate of 30 percent, which leads to a Net Income value just under $4.5 billion ($0.47/share). This matches the company's guidance of $0.45 to $0.48 per diluted share. Net income was $3.0 billion ($0.31/share) in the year-earlier quarter.

Please note that the tabular format below, which we use for all analyses, can and often does differ in material respects from company-used formats. A common difference is the classification of income and expenses as Operating and Non-Operating. The standardization is simply for convenience and to facilitate cross-company comparisons.

($M)		June 2008 (predicted)	June 2007 (actual)
Revenue		15650	13371
Op expenses
	CGS	(2817)	(3237)
	R&D	(2113)	(1948)
	SG&A	(4695)	(4197)
	Other	0	0
Operating Income		6025	3989
Other income
	Investments	0	0
	Interest, etc.	350	295
Pretax income		6375	4284
Income tax		(1913)	(1249)
Net Income		4463	3035
		$0.47/sh	$0.31/sh
Shares outstanding		9400	9657

INTC: Look Ahead to June 2008 Results

When we evaluated Intel after the first quarter of this year, our Overall Gauge of the company rose to 49 points, of the 100 possible points, from just 33 points the previous quarter. The increase was driven by the rejuvenated Value gauge, which rose from zero to 8 points of the 25 possible points. The Value leap was enabled by a painful market correction that rained on both healthy and ailing companies. The first-quarter data also lifted the Growth and Profitability gauges; both read a tempting 15 points, where 25 is the maximum value.

High-tech bellwether Intel Corporation (INTC) manufactures integrated circuits for computers, servers, hand-held devices, and communication products.

With the good operating performance reflected in the rising gauge scores, it's not surprising that the price of Intel shares has edged upwards in the second quarter to date. In addition, at least one analyst has made positive comments about the impact the new, low-cost Atom microprocessor will have on sales and margins.

When Intel's second quarter results are reported on 15 July 2008, we will get a measure of the effect the slowing U.S. economy is having on technology companies. While Intel's sales mostly met expectations in the first quarter, the Gross Margin was hurt by lower-than-expected prices for NAND flash memory chips.

When looking ahead, the GCFR approach is to extrapolate from the past and to make some adjustments based on credible current conditions and forecasts. Intel makes our job easy by providing explicit guidance for most of the items on the Income Statement. (We have to make many more assumptions to estimate the results of other companies.)

Comparisons with previous results will be complicated by Intel's first-quarter transfer of assets to Numonyx B.V., a new company that combines Intel's NOR flash memory business and STMicro's NAND business.

In the first quarter report, Intel provided several forward-looking statements, with appropriate caveats, about its expectations for the second quarter. The company also updated its guidance for the full year. Since management knows the business infinitely better than we do, their guidance forms the basis for our expectations.

Intel estimated that Revenue in the June 2008 quarter will be between $9.0 and $9.6 billion. If this seems a little light, it reflects the spin-off of NOR flash memory assets. The midpoint of this range, $9.3 billion, would equate to a 7.1-percent gain over the Revenue figure reported for the June 2007 quarter. However, Intel's Flash Memory Group operating segment was responsible for $494 million (5.7 percent) of Intel's total Revenue of $8.68 billion in the June 2007 quarter. if we assume half of the flash memory Revenue was due to assets subsequently transferred to Numonyx, the comparable year-earlier total Revenue figure would be about $8.43 billion, and the truer second quarter sales gain would be 10.3 percent.

Collectively, financial analysts have also centered their aim at the midpoint value of the forecast range for the second quarter; their Revenue predictions average $9.31 billion.

Intel predicted it would achieve a Gross Margin in the second quarter of "56 percent plus or minus a couple of points." After having reduced the margin forecast in the middle of the first quarter, establishing 56 percent as the target for the second quarter indicated management's optimism. Given the Revenue estimate above, Intel is leading us to expect a CGS of about (1 - 0.56) * $9.3 billion = $4.1 billion.

The company indicated R&D and SG&A costs would total between $2.8 and $2.9 billion in the second quarter. This is about 30.6 percent of the forecast Revenue. Since the company didn't break down this figure for us, we have used historical results to allocate 15.5 of the 30.6 percent to R&D and the remaining 15.1 percent to SG&A.

We will accept without question the company's $250 million estimate for restructuring and asset impairment charges.

The assumptions described above yield an estimated Operating Income for the quarter of $2.1 billion, a substantial 56 percent gain over the year-earlier figure.

Intel's guidance for net gains from equity investments, interest and other non-operating income was $75 million. We suspect -- and this is just a guess -- the guidance signals an expectation for a significant loss on equity investments. The indicated figure would result in Income before Taxes just under $2.2 billion.

Effective income tax rates shouldn't change dramatically from quarter to quarter, but the resolution of a dispute with the IRS led to abnormally low rates in parts of 2007 as Intel was allowed to reverse some previously accrued taxes. For the tax rate in the second quarter of 2008, we'll use Intel's estimate of a more typical 33 percent. This estimate would lead to a provision for income taxes of $720 million.

With all these assumptions, Net Income in the first quarter will be $1.47 billion ($0.25/share), up modestly from $1.28 billion in the year-earlier quarter. The comparison with the June 2007 quarter is made more difficult because the effective income tax rate in the earlier quarter was only 16.4 percent. Analysts are predicting earnings per share of $0.26 in the current quarter, which suggests they are expecting the company to surpass company guidance by a small amount. This wouldn't surprise us.

Please note that the presentation format below, which we use for all analyses, may differ in material respects from company-used formats and terminology. A common difference is the classification of income and expenses as Operating and Non-Operating. The standardization is simply for convenience and to facilitate cross-company comparisons.

($M)		June 2008 (predicted)	June 2007 (actual)(1)
Revenue		9300	8680
Operating expenses
	CGS	(4092)	(4605)
	R&D	(1442)	(1353)
	SG&A	(1404)	(1284)
	Other	(250)	(88)
Operating Income		2112	1350
Other income
	Investments	(75)	(1)
	Interest, etc.	150	180
Pretax income		2187	1529
Income tax		(722)	(251)
Net Income		1466	1278
		$0.25/sh	$0.22/sh
Shares outstanding		5900	5917

1. Includes the NOR flash memory business subsequently transferred to Numonyx.

CSCO: Financial Analysis through April 2008 (Update)

Cisco Systems, Inc. (CSCO), the proud plumber of the Internet, has a commanding position in the market for enterprise networking products and services, such as routers.

We previously posted an analysis of the company's preliminary results for the April 2008 quarter. Cisco subsequently submitted a more complete quarterly report in a 10-Q filed with the SEC. The additional data in the 10-Q did not affect the gauge scores, we previously posted, as shown below.

• Cash Management: 10 of 25
• Growth: 9 of 25
• Profitability: 15 of 25
  
• Value: 10 of 25
  
• Overall: 46 of 100

The 10-Q includes much information about the company's operational performance and financial standing. We thought that the most interesting remarks concerned Nuova Systems, Inc., which developed technologies for enterprise data centers. Cisco first bought approximately 80 percent of Nuova, which included several former Cisco execs, in August 2006. In the first quarter of 2008, Cisco exercised an option to purchase the remaining 20 or so percent. The selling shareholders will receive up to three payments, to be made between fiscal years 2010 and 2012, with the amounts determined by an undisclosed formula that reflects the success of products developed by Nuova Systems.

Cisco originally indicated that the potential payout for the remaining interests in Nuova would be between $10 and $578 million. The latest 10-Q states that Cisco recorded a charge of $246 million for these payments and the amount could be adjusted as high as $678 million.

We didn't see an explanation for the $100 million difference between the two upper figures. We're also unclear why Cisco considers the purchase price to be a compensation expense.

HD: Financial Analysis through April 2008

We have analyzed Home Depot's preliminary report for fiscal 2008's first quarter, which consisted of the 13 weeks ended 4 May 2008. This period is referred to as the April quarter because retailers typically track sales for intervals that end near 31 January, 30 April, 31 July, and 31 October. Home Depot's initial, pre-10-Q financial statements were, as usual, incomplete. The Balance Sheet was abbreviated, and the Cash Flow Statement was omitted.

We will update our evaluation after the company submits a 10-Q report to the SEC.

The Home Depot, Inc. (HD) is the largest retailer of do-it-yourself merchandise, which includes building materials, home improvement supplies, and lawn and garden products. After Frank Blake replaced Robert Nardelli (now at Chrysler) as Chairman and CEO, the company sold the Home Depot Supply division to a consortium of private equity firms. The sale of the unit serving professional contractors closed on 31 August 2007 at a price of $8.5 billion, which was $1.8 billion less than the originally negotiated figure. The company used the proceeds and other funds to complete a $10.7 billion Dutch Auction tender offer for its own shares. The offer is part of a larger $22.5 billion "recapitalization" plan, although there has been speculation that the further share repurchases will be delayed considerably.

RBS Partners, L.P., a fund associated with Edward Lampert, reported in a Form 13F filing, that it owned more than 22.7 million Home Depot shares on 31 March 2008. The position was worth $636.7 million on that date. Mr. Lampert is Chairman of Sears Holdings.

When we analyzed Home Depot after 2007's final results became available, the Overall score was an encouraging 45 of 100 points. Of the four individual gauges that fed into this composite result, Value was the strongest at 13 of 25 points. Cash Management was weakest at 8 of 25 points.

Because Home Depot's corporate structure changed substantially in 2007, our gauge scores should be treated with an extra dose of skepticism. Comparisons of current financial data with historic results drive the numbers, and the validity of some comparisons is questionable. Caution is also advisable because of the uncertain state of the housing market.

Now, with the available data from the April 2008 quarter, our gauges display the following scores:

• Cash Management: 9 of 25 (up from 8 in January)
  
• Growth: 10 of 25 (unchanged)
• Profitability: 9 of 25 (down from 11)
• Value: 11 of 25 (down from 13)
  

• Overall: 41 of 100 (down from 45)

These scores are subject to change after we evaluate the 10-Q report.

Before examining the metrics associated with each gauge, we will compare the latest quarterly Income Statement to our previously communicated baseline.

Please note that the presentation format below, which we use for all analyses, may differ in material respects from company-used formats. A common difference is the classification of income and expenses as Operating and Non-Operating. The standardization is simply for convenience and to facilitate cross-company comparisons.

($ M)		4 May 2008 (actual)	4 May 2008 (predicted)	29 April 2007 (actual)
Revenue		17907	17700	18545
Operating expenses
	CGS	(11835)	(11682)	(12282)
	Depreciation	(444)	(475)	(405)
	SG&A (1)	(4357)	(4247)	(4186)
	Other	(543)	(547)	(0)
Operating Income		728	748	1672
Other income
	Investments	0	0	0
	Interest, etc.	(164)	(200)	(160)
Pretax income		564	548	1512
Income tax		(208)	(204)	(565)
Net Income from continuing operations		356 $0.21/sh	344 $0.20/sh	947 $0.48/sh
Discontinued operations		0	0	99
Net Income		356 $0.21/sh	344 $0.20/sh	1046 $0.53/sh
Shares outstanding		1683	1680	1969

(1) The $543 million charge related to fewer new stores and closing existing stores was excluded from the 1Q 2008 SG&A amount and listed separately.

Revenue in the April 2008 quarter was 1.2 percent above our target, but 3.4 percent less than in the year-earlier quarter. Using the midpoint of management guidance for 2008, we expected sales would decline by 4.5 percent. On a year-over-year basis, Revenue fell 1.9 percent.

We thought the company could achieve a Gross Margin in the quarter of 34 percent, and they almost made it. The margin was 33.9 percent. In other words, the Cost of Goods Sold (CGS) was 66.1 percent of Revenue.

Depreciation expenses were $31 million below our target, which was based on the company's guidance for the full year. Depreciation was 2.5 percent of Revenue, instead of 2.7 percent.

Sales, General, and Administrative (SG&A) expenses, excluding special charges, were 24.3 percent of Revenue, a little higher than our forecast of 24.0 percent.

On 1 May 2008, Home Depot announced it would recognize a $547 million charge in the first quarter because of its decision to open fewer-than-planned new stores and to close 15 existing stores. The actual charge was $543 million.

Greater Revenue and higher costs nearly balanced. Operating Income was only 2.7 percent below the forecast value.

Non-Operating interest expense was a substantial $36 million less than we expected. And, the Income Tax Rate was also slightly lower than predicted: 36.9 percent vs. 37.2 percent guidance. As a result, Net Income from continuing operations surpassed our prediction by 3.5 percent.


Cash Management. This gauge increased from 8 points in January to 9 points now.

	April 2008	3 months ago	12 months ago
Current Ratio	1.2	1.2	1.4
LTD/Equity	64.0%	64.3%	45.3%
Debt/CFO	3.1 yrs	2.3 yrs	1.8 yrs
Inventory/CGS	97.0 days	87.3 days	97.6 days
Finished Goods/Inventory	N/A	N/A	N/A
Days of Sales Outstanding (DSO)	12.1 days	10.6 days	16.2 days
Working Capital/Market Capitalization	3.6%	3.0%	6.6%
Cash Conversion Cycle Time	43.9 days	50.3 days	47.9 days

Home Depot's capital structure became significantly more leveraged last year, but no more so in the first quarter. The reductions in DSO and CCCT could be signs of efficiency improvements. However, 97 days of inventory, measured by cost, seems to be tying up more working capital than necessary. (Wal-Mart's inventory is about 45 days at cost.)


Growth. This gauge didn't change from 10 points in January.

	April 2008	3 months ago	12 months ago
Revenue growth	-1.9%	-2.1%	-4.5%
Revenue/Assets	168%	175%	139%
CFO growth	N/A	-25.2%	-5.7%
Net Income growth	-24.9%	-20.1%	-19.4%

Growth rates are trailing four quarters compared to four previous quarters.

The growth score is driven entirely by the substantial increase in Revenue as a percentage of Assets. The latter decreased as a result of the share repurchase.


Profitability. This gauge decreased from 11 points in January to 9 points now.

	April 2008	3 months ago	12 months ago
Operating Expenses/Revenue	91.1%	90.6%	89.4%
ROIC	14.5%	15.0%	14.1%
FCF/Equity	N/A	12.2%	11.3%
Accrual Ratio	N/A	-14.2%	4.6%

We await the Cash Flow data to get a better read on Profitability, but the Increase in Operating Expenses is discouraging. On the other hand, for a company in the midst of the housing slump, a 14.5 percent ROIC doesn't seem so bad.


Value. Home Depot's stock price slipped from $30.64 on 31 January to $28.80 on 30 April 2008. The Value gauge, based on the latter price, decreased to 11 points from 13 points three months ago.

	April 2008	3 months ago	12 months ago	5 year median
P/E	13.4	12.2	15.5	15.6
P/E to S&P 500 average P/E	77.0%	73.2%	93.2%	91.4%
Price/Revenue	0.6	0.7	1.0	1.0
Enterprise Value/Cash Flow (EV/CFO)	N/A	11.3	13.1	12.8

The average P/E for the Retail - Specialty industry is 16.6, and the average Price/Sales is 1.1.

Home Depot is selling at a discount to the market.

We need the full set of financial statements that will be in the 10-Q report, but our initial reading of the Overall Gauge is a score of 41 out of 100 possible points.

HD: Look Ahead to Fiscal 2008 First Quarter Results

On Tuesday, Home Depot will report its results for the quarter that ended 4 May 2008. This 13-week period was the first quarter of the company's 2008 fiscal year.

The Home Depot, Inc. (HD) is the largest retailer of do-it-yourself merchandise, which includes building materials, home improvement supplies, and lawn and garden products. New management sold the Home Depot Supply division, which served professional contractors, to a consortium of private equity firms on 31 August 2007. The price was $8.5 billion, or $1.8 billion less than the figure originally negotiated. Management then executed a $10.7 billion Dutch Auction tender offer for Home Depot shares.

We've modeled Home Depot's Income Statement for the latest quarter. The intent of this exercise was to produce a baseline for identifying any deviations, positive or negative, in the actual data. Our estimates were derived from trends in the company's historical financial results and guidance provided by company management.

When reporting fiscal 2007's fourth-quarter and full-year results last February, Home Depot management issued the following guidance for fiscal 2008:

• Total sales decline of 4 to 5 percent
• Negative comps in the mid to high single digit range
• Flat to slightly positive gross margin expansion
• Operating margin decline of 170 to 210 basis points
• Depreciation and amortization expense of approximately $1.9 billion
• Income tax rate of 37.2 percent
• Continuing operations earnings per share decline of 19 to 24 percent
• Capital expenditures of $2.3 billion
• 55 new store openings with 5 store relocations

This guidance was updated on 1 May 2008, when Home Depot announced "it will no longer pursue the opening of approximately 50 U.S. stores that have been in its new store pipeline, in some cases for more than 10 years." The company will also shutter 15 existing stores in the U.S.

Canceling plans for new stores will reduce the company's capital spending by about $1 billion over several years. However, the decision will result in a $400 million charge to current earnings because previously capitalized development costs will have to be written off.

Home Depot indicated that the closing of the 15 existing stores will lead to additional charges of $186 million. Of the $586 million total charge to earnings, the company plans to recognize $547 million in the first quarter. This charge will exacerbate the earnings decline that was predicted in the February's guidance and re-iterated in May.

Revenues were $18.5 billion in the April 2007 quarter, excluding the sales of the former Home Depot Supply business. If the company's guidance to expect a 4 to 5 percent decline was accurate, sales in the April 2008 quarter were probably between $17.6 and $17.8 billion. We will split the difference and set $17.7 billion as our estimate.

In the year-earlier quarter, Home Depot's Gross Margin as a percentage of Revenue was 33.8 percent, and the margin averaged 33.6 percent over the last four quarters. Given the company's guidance to expect "Flat to slightly positive gross margin expansion," a reasonable, if not slightly optimistic margin expectation for the April 2008 would be 34 percent. Therefore, given our Revenue estimate, the Cost of Goods Sold (CGS) in the first quarter should be about (1-.34) * $17.7 billion, or $11.7 billion.

Management indicated that Depreciation and amortization expenses will be about $1.9 billion for the year. If we divide this by four, an estimate for the quarter is $475 million.

Sales, General, and Administrative (SG&A) expenses as a percentage of Revenue have averaged 22 percent over the last four quarters. However, this ratio has been increasing, reaching 24.7 percent in the January 2008 quarter. For the first quarter estimate, we will assume 24 percent. Accordingly, we're expecting SG&A expenses to be 0.24 * $17.7 billion, or $4.25 billion.

In the Other Operating Expense category, we expect to see, at a minimum, the massive $547 million charge due to the reduction in new and existing stores.

Our estimates for Revenue and Operating Expenses would result in an Operating Income of $748 million, down 55 percent from the year-earlier quarter. The decline is 22.5 percent if we exclude the special charge.

Net interest and other expenses have been increasing. We will somewhat arbitrarily choose $200 million as our estimate for these expenses in the first quarter. This value would decrease pre-tax income to $548 million.

Management guided analysts to expect an income tax rate of 37.2 percent. This rate would suggest that provisions for income taxes will be $204 million, and Net Income will be $344 million ($0.20 per share, if the number of shares outstanding hasn't changed much from January). This figure is 64 percent below Net Income from continuing operations in the year-earlier quarter. On a per-share basis, earnings would be down 58 percent. Excluding the $547 million special charge, earnings per share would be down 15 percent (less than company guidance).

Please note that the tabular format below, which we use for all analyses, can and often does differ in material respects from company-used formats. A common difference is the classification of income and expenses as Operating and Non-Operating. The standardization is simply for convenience and to facilitate cross-company comparisons.

($ M)		4 May 2008 (predicted)	29 April 2007 (actual)
Revenue		17700	18545
Operating expenses
	CGS	(11682)	(12282)
	Depreciation	(475)	(405)
	SG&A	(4247)	(4186)
	Other	(547)	(0)
Operating Income		748	1672
Other income
	Investments	0	0
	Interest, etc.	(200)	(160)
Pretax income		548	1512
Income tax		(204)	(565)
Net Income from continuing operations		344 $0.20/sh	947 $0.48/sh
Discontinued operations		0	99
Net Income		344 $0.20/sh	1046 $0.53/sh
Shares outstanding		1680	1969