OAKMARK FUNDS'
BILL NYGREN & HENRY BERGHOEF

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Loomis: How about Home Depot where you do agree with Bill Miller. He's been buying Home Depot. What do you think about it?

Nygren: I think Home Depot is a great company - one of the few companies you can read a research report on that talks about growth being "only" 15% and what they can do to fix it.

Nygren: The concern with Home Depot, I think, is twofold: One concern is over a housing bubble, which has kind of affected everything in the home space - whether you're talking about mortgage lenders, building products companies, homebuilders or home improvement stores.

Nygren: And the second concern is the success that Lowe's has had. But both companies are dominant within their category. And both have a very strong history of growth and very strong franchises.

And I think that the market is certainly big enough for both companies to be successful - especially since they're pursuing different courses and going for very different segments. Home Depot is going for the price-sensitive individual and the professional, whereas Lowe's is going more the speciality store route - in effect, saying: "We want a better assortment, a better display and a better shopping experience."

Lowe's has done better recently. Their comps are stronger. But part of that may be that Home Depot was expanding too fast. We'll see over the next couple of years - because they're slowing down their expansion.

But we think they're both excellent operators. It's just that there's a certain kind of customer who prefers a Lowe's store to a Home Depot store, just as there are customers who prefer a Home Depot to a Lowe's. And much like Target and Wal-Mart seem to attract different types of customers - and both continue to be extremely successful - we believe Home Depot and Lowe's will coexist with their differences.

Nygren: It's possible that it's not the company it was three to five years ago. We actually think it is still the company it was three to five years ago. But even if it's not, there's a lot of room between growing 30% per year and selling at 50 times earnings and growing so slowly that you justify selling at 75% of the market multiple.

Home Depot, on almost anybody's projections, continues to grow substantially faster than the S&P 500. And it's got a P/E multiple now that's substantially below the S&P 500. Home Depot is selling at something around 14 times estimated earnings for next year in a market that's at almost 19 or 20 times. We believe that Home Depot deserves a premium. And we think the results that they'll achieve during the next couple of years are likely to demonstrate that. We think it's a rare opportunity to buy such a great business on the terms we like to buy stocks.

Nygren: There's been a management change that has concerned investors. Bob Nardelli came over from G.E. Bob's focus is more, as is typical at G.E., on figuring out how to use their size advantage to better their cost position. And investors aren't as comfortable paying for growth that comes from cost savings as they are for growth that comes from top line growth. But we think they have equivalent value to the investor.

Nygren: The other part of the Home Depot plan is that with slower store expansion - so that they don't cannibalize their existing stores quite as much as they were doing - for the first time in a long time, they will be significant excess cash flow generators. And with the stock at this price, they've got an opportunity to shrink their capitalization at below fair value - which is obviously good for all the rest of us who own stock.

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