Bio

Bachelor of commerce,

McGill University

; M.B.A.,

Stanford Business School

. Balter joined

Donaldson, Lufkin & Jenrette

as a senior analyst tracking retail companies in 1991. He came to

Credit Suisse First Boston

this fall when that firm bought DLJ. Earlier, he worked at

Goldman Sachs

for seven years, three as a retail analyst and four as an investment banker specializing in retail companies.

Industry Outlook and Style

To be able, in good conscience, to slap a buy rating on any retailer these days is cause for celebration. After all, the entire sector has declined 21%, with no relief in sight, most analysts agree.

Gary Balter, Credit Suisse First Boston's hard-lines expert and a long-time follower of the home improvement market, has determined that

Home Depot

(HD) - Get Report

and

Lowe's

(LOW) - Get Report

, the two do-it-yourself companies left standing after a protracted industry shakeout, are worthy of his buy rating. It's one he has assigned sparingly in this year of nose-diving retail stocks.

"The fact that Home Depot and Lowe's are now an oligopoly gives them tremendous power over their suppliers," says Balter. Because of this pricing power, their gross margins have been improving for the past three years, and earnings have followed suit. This trend will continue in the coming year, Balter believes.

What will give Home Depot, his favorite do-it-yourself stock, extra oomph in 2001 is its binful of innovative retailing concepts, introduced over the past three years and likely to be rolled out over the next five. These include its

Expo

stores, which serve the high-end decorator market;

Villager

hardware stores, which cater to the convenience customer and are like a bigger version of

Ace Hardware

; and the

Pro

line, which is directed at homebuilding and remodeling contractors and sold through existing Home Depot stores.

All of these ventures offer an even higher return on investment, or ROI, than does the core Home Depot store, according to the analyst. "Home Depot has already had one of the highest returns in retailing," he says, "and now it's able to grow the ROI even further with these new initiatives."

Balter is projecting that Home Depot's earnings will ratchet up at a 23% to 25% clip for the next three to five years. That translates into earnings per share estimated at $1.15 to $1.17 for 2000, as compared with $1 last year. Next year, Balter thinks EPS could reach $1.45.

Earnings growth has been even higher in the past five years -- 40% last year, for example -- but "one has to remember that as the business matures, you can't expect that kind of growth forever," he says.

Though he doesn't have much else to pick from, Balter does think Lowe's is also a buy. "After having stayed away from Lowe's for most of the past year, I've been warming up to it lately," he concedes, citing its ability to generate solid returns in metro markets, where it competes head-to-head with Home Depot. (The latter is not in smaller markets, where the ROI isn't as high.)

Balter projects Lowe's earnings will grow in the 20% to 25% range -- "very decent for that company." Lowe's 1999 EPS came in at $1.79; 2000 could reach $2.25, and 2001 could see $2.70, the analyst estimates.

Despite the woes in retail land, Balter has an optimistic outlook for home improvement. "It's a $400 billion sector with two pure publicly traded players left, which, combined, have captured less than 20% of the market," he says.

Their diversified competitors --

Sears

(S) - Get Report

,

Target

(TGT) - Get Report

,

Kmart

(KM)

,

Wal-Mart

(WMT) - Get Report

, plus paint company

Sherwin Williams

(SHW) - Get Report

and a plethora of smaller private companies -- constitute the other 80% of this market.

In the next year, Balter anticipates, "the sector could achieve growth somewhere in the midsingle digits, assuming the economy doesn't go into recession. And these two companies, Home Depot and Lowe's, could achieve the low-to-mid-20s growth rates we're looking for," he says, as they gobble up more and more market share.

Stock Pick

Favorite stock for next 12 months:

Home Depot

Target price within two years: $75

Comment:

"Home Depot, currently trading at $39, has been down big-time this year -- some 43% since its artificial pop-up at the beginning of the year. We're saying that in 2001 it should start to recover and will rebound at the same 23% to 25% rate at which earnings improve. This has to be a longer-term investment, because there are too many near-term jitters about the Christmas season, and we're going against Y2K comparisons in the fourth quarter. Last year at this time, you'll remember, people were buying flashlights, generators, batteries and other emergency supplies" in preparation for

Y2K.

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