3 Buys From Lone Pine Capital Holdings
Madhukar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Lone Pine has $18.6 billion worth of assets under management. Currently, Priceline.com (NASDAQ: PCLN) holds 6.74%, Dollar General (NYSE: DG) holds 3.87%, and Google (NASDAQ: GOOG) holds 5.96% in Lone Pine's portfolio.
Lone Pine adopts the investment strategy of "bottom-up stock picking." Under this strategy, companies are analyzed on the basis of their performance rather than their industry or the macro-economic factors of the country to which they belong.
In this article, I have analyzed three top holdings of Lone Pine's portfolio to identify the investing opportunity in each of these companies.
New product offering will boost revenue
With the rising demand in reasonably-priced products, Dollar General is expanding with 365 new stores and relocating 550 stores in the U.S. by the end of 2013. This will include 20 DG mini-supermarkets, 40 DG plus-stores, and all others will be in the core DG format. Its total retail space is expected to increase by 7% from this expansion.
Under the expansion plan, the company has allocated $300 million as capital expenditure and $155 million as working capital investment. Expansion will result in the rise of the free cash flow of the company to $666 million by the end of this year from $536 million last year. The sales growth of the company is also expected to increase to 12.4% in the fourth quarter of 2013 from 8.5% in the first quarter of 2013.
Looking at the increasing demand of tobacco in competitors' stores, Dollar General tested tobacco sales in its 50 stores of Florida. The stores reported sales of approximately 33% more tobacco than planned by the company. The average purchase of a customer was $14 in stores where tobacco was available, in comparison to $11 in stores where tobacco was not available. With the positive results, the company will be adding tobacco in more than 10,500 locations by June 2013 across the U.S. The company's tobacco business is expected to generate $36 million in additional revenue by the end of 2013.
Higher revenue forecast
The mobile advertisement segment of Google contributed 17% of the company's total revenue in the first quarter of 2013. The company's mobile operating system, Android, raised its activation to 900 million subscribers in the first half of 2013 from 400 million in 2012. It is also working to increase its Android usage in underpenetrated areas around the world, which accounts for 4 billion people.
Marketers are now planning to target more on the mobile platform for their advertisements to reach larger masses. This will cause an upsurge in mobile advertisement rates, which will be positive for the company. Mobile advertisement revenue is expected to reach $14 billion by the end of 2014 from $7.5 billion in 2012. This will contribute around 27% of the total company's revenue by the end of 2016.
More than 6 billion hours of video per month are watched on Google's video site, Youtube, globally. The company plans to monetize this opportunity by launching a pilot program for video content makers, which will offer paid channels on Youtube. This initiative aims at increasing revenue for Youtube and its content makers. Initially there will be 53 paid channels with average monthly subscription fees of $4 per channel. This program is expected to generate $1 billion of additional revenue through fees charged by Google to content makers over three to five years’ time.
Focusing on smartphone growth and international business
Priceline acquired Kayak for $1.8 billion on May 21, 2013 to expand its offerings to smartphone users. According to a Trefis report, smartphone users around the globe are expected to rise to 1.6 billion in 2014 from 1 billion in 2012. The deal will allow Priceline to expand its offerings to smartphone users for the first time. It will allow the customers to easily compare the information from hundreds of travel websites on mobile devices. Through this initiative, the gross profit is expected to rise by 6% annually from 2013 to 2015. The total revenue will rise this year to $6.6 billion from $5.3 billion last year.
The company's first-quarter results were mainly driven by international hotel bookings: with the revenue from this segment reaching $7.8 billion, e-commerce transactions are growing at an annual rate of 19% in Asia and Europe. Looking at this growth rate, Priceline is now focusing on these continents. This is a good initiative, as in these markets there are many small and family-run hotel businesses that have lesser marketing budgets. Also, many of them aren't available on the Internet. Priceline aims at increasing the web presence of these small vendors.
Eventually, its international hotel booking revenue is expected to increase to $8.44 billion in the second quarter of 2013. This will be followed by $9.16 billion in the third quarter.
Priceline's international business and offering services to smartphone users will help the company to increase its revenue. Dollar General's expansion move and the addition of tobacco will help the company generate additional revenue. Google's mobile advertisements and an additional source of revenue from the Youtube pilot program will be beneficial for the company.
Considering the potential of these companies, I recommend buying all three.
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Madhu Dube has no position in any stocks mentioned. The Motley Fool recommends Google and Priceline.com. The Motley Fool owns shares of Google and Priceline.com. 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!