Focus on Home Depot as a Value Play

The corporate watchdogs are howling about another excessive pay package for an executive who has delivered shoddy stock returns. The executive under fire counters by pointing to his superior performance by any fundamental metric.

Could this be the time for a value-minded investor to swoop in and exploit the disconnect?

Forget for a moment all of the questions being raised about how the compensation committee on Home Depot's (HD Quote) board of directors arrived at Chairman and CEO Robert Nardelli's compensation package, from which he gleaned $245 million over his five years with the company even as the stock dropped 12%.

Forget, too, the symbolic slap in the face Home Depot gave its shareholders when no members of its board aside from the chairman showed up to face them at its recent annual meeting, and that Nardelli gave short shrift to the concerns of the people he works for.

These items may be troubling on many levels, but from a pure investment standpoint, their significance is negligible at best. The more pressing question concerning the underlying value of the home-improvement chain lies in why its shares have lost value in recent years while its fundamentals have soared. Home Depot's stock looks far cheaper than Nardelli's pay is rich.

"Home Depot has shown terrible corporate governance lately, but investors have to separate corporate governance from valuation," says Morningstar analyst Anthony Chukumba. "If I'm a shareholder, I'd much rather have the CEO act like a jerk at the annual meeting and pay me a fat dividend than serve me tea and cookies and then fritter away my investment."

While its shares declined over the last five years, Home Depot nearly doubled its sales, to $81.5 billion from $47.5 billion. During that time, its annual earnings climbed from $1.10 a share to $2.72 a share in 2005. It returned nearly $13 billion, or approximately 59% of its cumulative earnings, to shareholders in the form of dividends and share repurchases.