Insights From Lone Pine Capital’s Portfolio

Aubrey is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

It is always interesting to peer into the transactions of large asset managers such as Lone Pine Capital. The fund manager had a whopping $19.3 billion assets under management as of the latest quarter (based on whalewisdom compilation). I looked into its 13F filings to extract some investment ideas, and two of its big buys caught my attention. Lone Pine increased its position in Mead Johnson Nutrition (NYSE: MJN) by 87%, bringing the stake to more than 7 million shares, or 2.8% of its portfolio. Likewise, it doubled its position in Intuitive Surgical (NASDAQ: ISRG).

Despite the significant lag between the date of filing and the period concerned, the filings nonetheless provide important insights because the analysis is based on current metrics and market trends. Here is a quick assessment from a fundamental perspective to see whether these are worth considering or not.

A wonderful nutrition company

One of Lone Pine’s biggest buys in the latest quarter is Mead Johnson Nutrition. With a range of brands that have earned the loyalty, trust, and confidence of many parents for over a century, this is a company of high value. Nowadays, Mead Johnson Nutrition is not only confined to nutrition products for kids big and small and pregnant and lactating moms; it is also selling metabolic formulas that cater to those with more specific needs. It reaches consumers from many countries around the world.

A manifestation of the company's sound financials and operations is its impressive dividend history. Otherwise it would not have afforded to grow its annualized payout by an average rate of 19.8% in the last three years. Its payout ratio based on cash flow was 34% for 2012. It has a relatively large, growing amount of free cash on its books. Also, the company maintains its profitability with its double-digit profit margin, the most recent of which is around 16%. Its net operating cash flow continued to grow robustly by 23% and 9% in 2011 and 2012, respectively.

Looking ahead, EPS is expected to grow in the next five years by 11.0% on average. I believe there is more to expect from the industry and this company in the future. The U.S. economy continues to show signs of recovery, thereby fueling demand growth. At the same time, the Asia/Latin America segment, Mead Johnson Nutrition’s main growth driver in the latest quarter, is poised to continue the impressive sales performance.

The economic growth prospects in the developing Asian countries and the Latin American region have never been better. At the same time, aging populations and more health-conscious citizens in developed economies will demand more nutritional items and will be seeking quality healthcare services.

In terms of pricing, , the company’s P/E ratio, at 27.5, is above the industry’s 21.1 based on a Yahoo! compilation. Nonetheless, it has a lower PEG ratio at 2.2 compared to its competitors Nestle’s 3.8 and Danone’s 3.7, and the industry’s 2.8. Hence, with its value and growth potential, I believe that with a smart entry strategy Mead Johnson Nutrition makes a great long-term investment.

High Potential Healthcare Stock

The biggest buys of Lone Pine Capital are mostly healthcare stocks that have huge growth potential. This focus on the healthcare sector is a good decision considering the opportunity this sector offers. I picked Intuitive Surgical for its strong performance and promising growth potential.

Intuitive Surgical has an EPS (trailing-12 months) of $17.04, higher than that of Medtronic (NYSE: MDT) at $3.37 and the industry’s $0.82. A highly profitable company, Intuitive Surgical’s net profit margin has been continuously on the rise reaching 31% in the latest quarter. Quarterly revenue is rising by more than 20% year-on-year and its net operating cash flow has been growing at an average rate of 31% in the last four years. There is still a lot of action to expect from this company as the EPS is estimated to grow by 16.3% annually in the next five years.

The strong performance and huge potential of Intuitive Surgical lie mainly in its cutting edge product – the da Vinci Surgical System, which the company calls the future of surgery. The safety of the procedure is backed by a large body of clinical evidence. It is also one of the few that have been granted FDA clearance. This unique position within the industry justifies why it is priced quite higher than its competitors.

In terms of pricing, the P/E ratio of Intuitive at 29.2, or even its forward P/E of 24.1, is above the industry’s 20.1 and Medtronic’s 15.7, but if you take growth into consideration, the company is relatively cheaper. According to Yahoo!, its PEG ratio is 1.7 as opposed to Medtronic’s 2.0. To get a greater view of this stock's performance, I recommend you check this analyst’s post.

It is easy to get lured to Intuitive Surgical over its competitor Medtronic, which has a quarterly revenue growth of only about 4% although it is also a highly profitable business with profit margin above 20%. However, I laud Medtronic for its impressive dividend payouts, which is something that you cannot find in Intuitive Surgical. In fact, Medtronic has increased its annualized dividend payment by over 29% each year on the average in the past three years. Is this safe enough?

Well, its free cash flow has increased significantly in the previous year. Its payout ratio based on cash flow is roughly 23% which means it has left quite a substantial amount for reinvestment. Hence, if you are seeking for candidates in the healthcare sector, I say Medtronic is one that you might want to consider. To get to know about other healthcare stocks that pay the fastest growing dividends, go to my earlier post.


To conclude, looking at the portfolio of huge fund managers provide insights that one can reflect on in their investment decisions. I have picked a couple from Lone Pine Capital’s portfolio; these have had impressive growth performances and are poised for even greater positions in the future. I say Mead Johnson Nutrition and Intuitive Surgical are wonderful companies that are reasonably priced. If income is what you seek, Medtronic can also be a great addition to your investment portfolio.

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Aubrey Tabuga has no position in any stocks mentioned. The Motley Fool recommends Intuitive Surgical. The Motley Fool owns shares of Intuitive Surgical and Medtronic. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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