Home Depot needs repair, but Genesee & Wyoming is on track

Dear Mr. Berko: Please tell me about Home Depot. I bought it at $51 in 2002, and it can’t seem to get back there.

Dear Mr. Berko: Please tell me about Home Depot. I bought it at $51 in 2002, and it can’t seem to get back there. Also, what do you think of Genesee & Wyoming Railroad? I am thinking of buying 200 shares.

R.T.,

Vancouver, Wash.

Dear R.T.: I have ceased to be a Home Depot Inc. (HD-$39) aficionado. While Standard & Poor’s still has a “strong buy” on the stock, Goldman Sachs recently downgraded HD from “buy” to “neutral,” Credit Suisse just changed its ranking from “outperform” to “neutral” and Prudential Securities initiated HD to “underweight.”

It seems that Lowe’s Companies Inc. (LOW-$31.29) is gaining on HD.

Several weeks ago, I bought a ladder, paintbrushes and related equipment at HD. As I waited in one of those painfully slow lines, an employee not-too-nicely suggested that I queue up to HD’s computerized self-checkout counter. I’m always in favor of fast, courteous and friendly self-service. But I turned on my heels and skedaddled to LOW.

I’ve had my fill of demanding digital instructions. I won’t hunt for a silly key, then try to follow coded instruction etched in billions of green pixels, insert a credit card (I want to pay cash) and wait for it to have a private conversation with a darned microchip while I’m balancing 25 pounds of merchandise on my other hand. No siree, Home Depot and Chief Executive Officer Robert Nardelli can take those computerized checkout stations and shove ’em.

(LOW has them, too, but I’ve never been told to use one. I’m an old-fashioned kind of guy, and I’d rather be serviced by an illegal alien speaking butcher-block English. At least they can be caring human beings.)

So I bebopped to Lowe’s. The nice lady took my money with a “have a nice day” smile, and now HD is on my PTA (places to avoid) list. It seems that women (they are so much wiser than men and control the important things in the world) prefer to shop at LOW. The consensus among women: Lowe’s is “prettier,” it “smells better,” it’s “brighter and the employees are nicer.”

When Arthur Blank (founder and former CEO of HD) retired, Home Depot shares began to lose momentum. Blank has an energizing persona; he could walk through any store and call most employees by name. He was warm, personable, magnetic and charismatic, and you could feel his electricity.

The new CEO, Nardelli, is certainly no Arthur Blank. Nardelli is a stiff, formal, bean-counting CEO who looks at people as an entomologist with a syringe might study a beetle. Whereas Blank managed Home Depot from the bottom up, allowing the employees to give him the authority, Nardelli manages from the top down, imposing his authority on the employees below. The difference is certainly reflected in the performance of the stock during the past few years.

P.S. There’s talk that HD might be a leveraged buyout candidate in the near future.

Genesee & Wyoming Inc. (GWR-$27.67) owns, leases and operates 49 short-line regional railroads in the U.S., Canada, Bolivia, Mexico and Australia, with 9,300 miles of owned/leased track plus 3,000 miles under track-access arrangement. Revenue growth has been superb in the past four years (from $173 million in 2001 to $385 million in 2005), and net income doubled from 59 cents to $1.19. This year, revenue should climb to $445, and net income may reach $1.45 a share.

GWR’s North America system (which includes Canada) contributed 79 percent of income, Australia contributed 19 percent, while Bolivia and Mexico were responsible for 2 percent. Its Mexican line is losing money, and management believes that Bolivia will nationalize GWR’s engines and tracks. Good riddance to both of them.

Thomson Financial expects GWR’s revenue to top $525 million in 2007, and figures earnings will exceed $1.65. And that’s quite likely, as some of GWR’s growth will be fueled by acquisition. So far this year, GWR purchased the Chattahoochee & Gulf Railroad serving parts of Alabama and Georgia and recently bought the 12.5-mile rail line to the Portsmouth Container Terminal. Other acquisitions are on track, and there’s plenty of money available from the recent sale of its Australian line for $208 million. GWR plans to use that money to increase its short-haul properties in North America.

Since 2001, GWR has split its stock 3-for-2 on four occasions, and the shares reached an all-time high of $36 this year. The company has plenty of cash, low debt and record net-profit margins of 15.1 percent. Value Line believes that GWR can be a $70 number in three to four years. GWR seems to be the “Little Engine that Could,” and that appeals to me.

  • Malcolm Berko responds to letters he receives; send questions to Berko, c/o Central Penn Business Journal, P.O. Box 1416, Boca Raton, Fla. 33429. He answers questions by mail or in his column for free. If readers want in-depth analyses, they may be asked to become clients.

    ©Copley News Service

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