We emerged from Home Depot’s analyst meeting [earlier this month] with little change in our view about the company’s prospects: we are gratified that Home Depot is reinvesting in existing stores, but disappointed that it continues to invest aggressively in new stores as well, and believe that it still needs to reassert its merchandising leadership. At the same time, we acknowledge that the stock’s risk/reward profile is intriguing, with limited downside even if the company misses our earnings forecast for fiscal 2003, and substantial upside if it achieves earnings guidance of $1.67 to $1.77 per share. We are still maintaining our In-Line rating on the stock, within the context of our Cautious view on Hardlines Retail, given our views on growth and merchandising, and our belief that the economic backdrop will only get tougher for Home Depot.

We are maintaining our Lowe’s estimates and believe that despite a difficult selling environment improving execution is driving mkt share gains from Home Depot. We believe Lowe’s lower average ticket and more diversified sales mix makes it a more attractive investment in an environment where consumers are becoming more price conscious & trading down to more affordable goods. We re-iterate our Outperform rating relative to our Marketweight sector stance.

We believe there was little in the Home Depot analyst meeting that will act as a catalyst for the stock near-term. There remain many cross currents in the business. Most of the positives relate to efficiency and costs, many of the negatives relate to flagging sales growth. We believe the stock may be range-bound for the next two quarters as comps remain under pressure. However, we believe the stock presents an interesting opportunity for value investors with a 12 to 18 month investment horrizon, given the company’s solid financial position and attractive valuation, by our analysis. Consequently, our rating remains an Outperform against our industry rating of a Marketweight.

Home Depot's stepped up re-investments make sense. Nonetheless, we believe the company faces numerous challenges in 2003. This includes a difficult sales environment, potentially exacerbated by reset disruptions, and the likelihood that return on capital will decelerate from here. We are uncertain about Home Depot's long-term sales and earnings growth rate.

Positive implications for Lowe's include Home Depot's view that store growth opportunities remain robust, particularly in new markets. This should alleviate some saturation concerns. Conversely, Home Depot's signal that it will remain aggressive with expansion plans in the Northeast, which is a key growth region for Lowe's, is a risk.

We prefer to wait on the sidelines as Home Depot plays "catch up" with its store investments and see no reason to change our $20 price target, (see details for derivation). We continue to prefer Lowe's due to better sales & earnings growth visibility and accelerating operating return-on-assets.

We rate Home Depot a Buy. The company is in the midst of a transition as new management pushes a new strategic focus of enhancing store productivity and profitability while secondarily growing square footage. We do not expect same-store sales, a critical indicator for the progress being made within Home Depot stores, to turn positive till late 2003. Given its market leadership, solid financials and an attractive valuation, we recommend clients seeking exposure to the consumer cyclical sector consider Home Depot.

We rate Lowe's a Buy for investors seeking growth. Continued growth in home improvement, the company's strong management and its increased presence in highly-populated metropolitan markets, provide a great platform to fuel sales and earnings growth in the high teens over the next three years.

We see little reason for investors to own Home Depot shares at current prices. As we have noted for some time, earnings risk remains considerable, since we doubt that the company’s current weakening trends can be reversed in a short period of time. Therefore, even if this management has assessed its problems accurately (about which we still have some doubts) and proceeds to execute effectively, we believe it will take more time than recent investors are expecting.

In addition, neither we nor anyone else knows if what we are witnessing is the beginning of a multi-year decline in this retailer. If so, the stock is still not inexpensive enough to buy, as growth and earnings estimates will more than likely be further reduced, putting pressure on the price until optimism finally evaporates.

We believe Home Depot stock is likely to trade in the $20 to $25 area, at best, over the next year. If management’s new, more-modest goals (9 percent to 12 percent sales growth in 2003 and 9 percent to 14 percent EPS growth, both from much-reduced bases) are not met, then further share price declines to less than $20 cannot be ruled out.