Lone Pine Capital was started in 1997 by Steven Mandel, formerly a managing director and analyst at Tiger Management for a period of 7 years. Mandel now manages $12 Billion and has a double-digit annual return since his fund’s inception.
Mandel is arguably the most successful of the Tiger cubs who left legendary founder Julian Robertson Jr. to start their own funds. Last year his funds, which he names after trees, continued to rack up impressive returns. Lone Pine was up 8 percent before fees.
Neither a growth nor a value investor, Mandel looks for good companies run by good people, with stock valuations below what he deems to be their intrinsic value. This search has taken him to high-fliers like Google as well as to homebuilders and foreign banks. Almost half of his assets are invested in non-U.S. stocks. Mandel has 12 investment professionals searching for ideas globally in seven broad industry groups — consumer, financial, health care, tele- communications and media, technology, business services and industrials.”
Here is Steve Mandel's portfolio:
Apple (AAPL, Financial): It is impressing to see that China now accounts for 12% of AAPL’s business revenue. The company has recently made it even easier for Chinese customers to purchase its product by accepting the Yuan as a payment currency. Emerging markets exposure is sure a key item that Steve Mandel evaluated in Apple.
At the beginning of October, AAPL launched its iPhone 4S, which topped 4 million unit sales in the first weekend. Apple still has more innovation in its products. For example it could launch a renewed iPhone 5, Ipad 3, revolutionize the TV, streaming content, etc.
Now looking at the company numbers, fourth quarter figures released on 18 October showed a quarterly revenue growth over the same period a year earlier of 39%. The operating margin of 31.22% translated into a profit margin of 23.95% and gave a return on equity of 41.67%. Its balance sheet shows cash of $25.95 billion, and no debt. With earnings per share of $27.68, the shares, currently around $370, are trading on a trailing price to earnings ratio of 13.55, in line with the sector average of 13.90.
Analysts have have a share price target of $505.94, a potential upside of 34.70%, with earnings rising to $38.59 per share in its next fiscal year (ending Sep 2013). This would place the shares on a forward price to earnings ratio of just 9.72. Too cheap to ignore.
Overall, this is a company with a pile of cash, great innovative products, and a steady management. It is making strong inroads into China, potentially the world’s largest consumer market. Its fundamentals are strong, its strategies are appealing, and its revenues continue to advance.
Cognizant Technologies (CTSH, Financial): Cognizant is a tech-outsourcing leader. The tech company has a P/E ratio of 28.8, and a forward P/E ratio of 20.9. Estimated annual EPS growth is 20.9% for the next five years. Profit margin (15.4%) crushes the industry average of 6.7%, while it has no dividend policy.
Cash flow is doing awesome. The company had an EPS growth of 19.67% this quarter, and 33.56% this year.. Target price indicates an about 6.9% increase potential, while 19 out of 28 analysts recommend buying. ROA and ROE are 19.04% and 23.63%, superb-multiples. Lee Ainslie and George Soros like CTSH. Lee initiated a new position in the last quarter and Soros increased it 70%. As Steve Mandel, they see a strong tech leader that is poised for higher growth rates in the future.
Dollar General (DG, Financial): Dollar General is in Buffett portfolio too. After struggling with overexpansion woes over the past few years, Dollar General is seeing its restructuring efforts pay off. Store productivity has improved tremendously, thanks to better merchandise assortments and customer-friendly store layouts. Additionally, consumers trading down to the deep-discount channel has provided the dollar store chain with significant tailwinds over the past year. However, I don't think current productivity is sustainable, as I believe some consumers may trade up to other retail channels once economic conditions improve. Furthermore, competition from other dollar store chains, mass merchants, grocery stores, and specialty retailers may weigh on the firm's results over the long term.
Coming off explosive new store growth in the earlier part of this decade, Dollar General's comparable sales fell from north of 7% during fiscal 2001 to a dismal 2% during 2007, largely because of the cannibalization of sales from existing stores. In an effort to revitalize the business, the firm slowed store growth, closed underperforming stores, and revamped its merchandise mix. Turnaround efforts, coupled with the benefits of consumer trade-down trends, caused Dollar General's comparable sales to rebound to the mid- to high-single-digit range over the past three years. More impressively, operating margins expanded substantially to 9.8% in 2010 from 2.7% in 2006, thanks to fewer merchandise markdowns, savings from the centralization of administrative and logistic functions and operating leverage gained.
One of the most notable highlights of the last earnings report was the decline in the interest expenses, which was registered at $60.7 million last quarter, $8 million less than that in the same quarter last year. This is due to the fact that substantial amount of borrowings were being bought back by the company and also for the lower interest rates due to positive notional result on interest rate swap.
In fact, the company again redeemed the remaining $839 million of outstanding aggregate principal amount of its 10.625% senior using excess cash and refinancing facility. The previous amount of 10.625% senior notes was worth $25 million principal amount in the open market in April this year. This resulted in a total loss of around $60.3 million ($36.7 million loss, net of income taxes or $0.11 loss per share). But it helped decrease the total long-term obligations by $572 million during the last twelve months. I believe this should play a big role in deciding the bottom-line of the company in the coming quarter this year.
Moreover, in addition to all these, Dollar General is all set to launch its e-commerce site by the beginning of this September. Along with over 9,500 stores in over 35 states, this site will be the complementary online shopping platform for the customers. "Dollar General is excited to meet the growing demand for online convenience and value," said Rick Dreiling, Dollar General's chairman and CEO. "We have streamlined the online shopping experience, giving customers what they need, as well as what they want, 24 hours a day, seven days a week, 365 days a year.”
Ralph Lauren (RL, Financial): Analysts in average have increased fair value estimates to $119 per share from $112, following solid year-to-date performance and a more favorable near-term outlook. The updated fair value estimate implies forward fiscal-year price/earnings of 17 times, enterprise value/EBITDA of 9 times, and free cash flow yield of around 4%. Although Ralph Lauren has been holding up well and the global high-end consumer is still spending, Consensus analysts expect its operating margins to be meaningfully compressed (from peak levels) during the next couple of quarters. Some of the pressure relates to the consolidation of the new South Korean business beginning in January 2011 and should be more one-time in nature, but raw-material, labor, and foreign exchange headwinds have yet to abate. They continue to believe that these cost pressures will normalize and ultimately reverse over time, but it's a noteworthy concern in the near term.
I the US, I see a picture of strength in the retail channel and a recovery in the wholesale segment to drive a mid-double-digit increase in revenue in fiscal year 2012. Over the long run, RL should have mid-single-digit sales growth, on average. Analysts expect an operating margin of around 14.7% in fiscal 2012, down 30 basis points year over year, driven by increased investment in international expansion, direct-to-consumer efforts, and input cost headwinds. As conditions improve and sales rebound, Ralph Lauren can sustain an operating margin in the midteens for the next five years. As the mix in sales shifts more to international retail from wholesale, we believe there could be some upside to normalized profitability over the long run.
I think that Steve got attracted by the fact that Ralph Lauren is also targeting international markets for growth and has assumed direct distribution control from select licensees (such as Japan and South Korea) in recent years. Revenue outside North America has increased at a 16% rate on average over the past five years, and an increased focus on the retail presence should help the label maintain relevance in today's competitive retail environment. With 742 stores in its global retail footprint, including 195 factory stores and 535 concession shop locations throughout Asia (as of July 2011), the firm has ample room for retail growth over the next decade.
Mandel is arguably the most successful of the Tiger cubs who left legendary founder Julian Robertson Jr. to start their own funds. Last year his funds, which he names after trees, continued to rack up impressive returns. Lone Pine was up 8 percent before fees.
Neither a growth nor a value investor, Mandel looks for good companies run by good people, with stock valuations below what he deems to be their intrinsic value. This search has taken him to high-fliers like Google as well as to homebuilders and foreign banks. Almost half of his assets are invested in non-U.S. stocks. Mandel has 12 investment professionals searching for ideas globally in seven broad industry groups — consumer, financial, health care, tele- communications and media, technology, business services and industrials.”
Here is Steve Mandel's portfolio:
Apple (AAPL, Financial): It is impressing to see that China now accounts for 12% of AAPL’s business revenue. The company has recently made it even easier for Chinese customers to purchase its product by accepting the Yuan as a payment currency. Emerging markets exposure is sure a key item that Steve Mandel evaluated in Apple.
At the beginning of October, AAPL launched its iPhone 4S, which topped 4 million unit sales in the first weekend. Apple still has more innovation in its products. For example it could launch a renewed iPhone 5, Ipad 3, revolutionize the TV, streaming content, etc.
Now looking at the company numbers, fourth quarter figures released on 18 October showed a quarterly revenue growth over the same period a year earlier of 39%. The operating margin of 31.22% translated into a profit margin of 23.95% and gave a return on equity of 41.67%. Its balance sheet shows cash of $25.95 billion, and no debt. With earnings per share of $27.68, the shares, currently around $370, are trading on a trailing price to earnings ratio of 13.55, in line with the sector average of 13.90.
Analysts have have a share price target of $505.94, a potential upside of 34.70%, with earnings rising to $38.59 per share in its next fiscal year (ending Sep 2013). This would place the shares on a forward price to earnings ratio of just 9.72. Too cheap to ignore.
Overall, this is a company with a pile of cash, great innovative products, and a steady management. It is making strong inroads into China, potentially the world’s largest consumer market. Its fundamentals are strong, its strategies are appealing, and its revenues continue to advance.
Cognizant Technologies (CTSH, Financial): Cognizant is a tech-outsourcing leader. The tech company has a P/E ratio of 28.8, and a forward P/E ratio of 20.9. Estimated annual EPS growth is 20.9% for the next five years. Profit margin (15.4%) crushes the industry average of 6.7%, while it has no dividend policy.
Cash flow is doing awesome. The company had an EPS growth of 19.67% this quarter, and 33.56% this year.. Target price indicates an about 6.9% increase potential, while 19 out of 28 analysts recommend buying. ROA and ROE are 19.04% and 23.63%, superb-multiples. Lee Ainslie and George Soros like CTSH. Lee initiated a new position in the last quarter and Soros increased it 70%. As Steve Mandel, they see a strong tech leader that is poised for higher growth rates in the future.
Dollar General (DG, Financial): Dollar General is in Buffett portfolio too. After struggling with overexpansion woes over the past few years, Dollar General is seeing its restructuring efforts pay off. Store productivity has improved tremendously, thanks to better merchandise assortments and customer-friendly store layouts. Additionally, consumers trading down to the deep-discount channel has provided the dollar store chain with significant tailwinds over the past year. However, I don't think current productivity is sustainable, as I believe some consumers may trade up to other retail channels once economic conditions improve. Furthermore, competition from other dollar store chains, mass merchants, grocery stores, and specialty retailers may weigh on the firm's results over the long term.
Coming off explosive new store growth in the earlier part of this decade, Dollar General's comparable sales fell from north of 7% during fiscal 2001 to a dismal 2% during 2007, largely because of the cannibalization of sales from existing stores. In an effort to revitalize the business, the firm slowed store growth, closed underperforming stores, and revamped its merchandise mix. Turnaround efforts, coupled with the benefits of consumer trade-down trends, caused Dollar General's comparable sales to rebound to the mid- to high-single-digit range over the past three years. More impressively, operating margins expanded substantially to 9.8% in 2010 from 2.7% in 2006, thanks to fewer merchandise markdowns, savings from the centralization of administrative and logistic functions and operating leverage gained.
One of the most notable highlights of the last earnings report was the decline in the interest expenses, which was registered at $60.7 million last quarter, $8 million less than that in the same quarter last year. This is due to the fact that substantial amount of borrowings were being bought back by the company and also for the lower interest rates due to positive notional result on interest rate swap.
In fact, the company again redeemed the remaining $839 million of outstanding aggregate principal amount of its 10.625% senior using excess cash and refinancing facility. The previous amount of 10.625% senior notes was worth $25 million principal amount in the open market in April this year. This resulted in a total loss of around $60.3 million ($36.7 million loss, net of income taxes or $0.11 loss per share). But it helped decrease the total long-term obligations by $572 million during the last twelve months. I believe this should play a big role in deciding the bottom-line of the company in the coming quarter this year.
Moreover, in addition to all these, Dollar General is all set to launch its e-commerce site by the beginning of this September. Along with over 9,500 stores in over 35 states, this site will be the complementary online shopping platform for the customers. "Dollar General is excited to meet the growing demand for online convenience and value," said Rick Dreiling, Dollar General's chairman and CEO. "We have streamlined the online shopping experience, giving customers what they need, as well as what they want, 24 hours a day, seven days a week, 365 days a year.”
Ralph Lauren (RL, Financial): Analysts in average have increased fair value estimates to $119 per share from $112, following solid year-to-date performance and a more favorable near-term outlook. The updated fair value estimate implies forward fiscal-year price/earnings of 17 times, enterprise value/EBITDA of 9 times, and free cash flow yield of around 4%. Although Ralph Lauren has been holding up well and the global high-end consumer is still spending, Consensus analysts expect its operating margins to be meaningfully compressed (from peak levels) during the next couple of quarters. Some of the pressure relates to the consolidation of the new South Korean business beginning in January 2011 and should be more one-time in nature, but raw-material, labor, and foreign exchange headwinds have yet to abate. They continue to believe that these cost pressures will normalize and ultimately reverse over time, but it's a noteworthy concern in the near term.
I the US, I see a picture of strength in the retail channel and a recovery in the wholesale segment to drive a mid-double-digit increase in revenue in fiscal year 2012. Over the long run, RL should have mid-single-digit sales growth, on average. Analysts expect an operating margin of around 14.7% in fiscal 2012, down 30 basis points year over year, driven by increased investment in international expansion, direct-to-consumer efforts, and input cost headwinds. As conditions improve and sales rebound, Ralph Lauren can sustain an operating margin in the midteens for the next five years. As the mix in sales shifts more to international retail from wholesale, we believe there could be some upside to normalized profitability over the long run.
I think that Steve got attracted by the fact that Ralph Lauren is also targeting international markets for growth and has assumed direct distribution control from select licensees (such as Japan and South Korea) in recent years. Revenue outside North America has increased at a 16% rate on average over the past five years, and an increased focus on the retail presence should help the label maintain relevance in today's competitive retail environment. With 742 stores in its global retail footprint, including 195 factory stores and 535 concession shop locations throughout Asia (as of July 2011), the firm has ample room for retail growth over the next decade.
