In this installment of my analysis of recent purchases made by renowned investment advisories, I will present the 5 largest stock investments made by Edgewood Management during the 4th quarter of last year using the latest available SEC filings. I have also calculated my preliminary price targets for the stocks using relative valuation to judge the attractiveness of these companies at current prices.
Edgewood Management, LLC manages approximately $6.3 billion in assets and employs a large cap growth strategy. The company runs the Edgewood Growth Fund and has outperformed the S&P500 during the last 1 year, 5 year and 10 year period.
Sectors represented on the list include consumer/non-cyclical, technology, and services.
1) Mead Johnson Nutrition (MJN)
MJN is a $15.12 billion company by market capitalization and is the world's largest maker of baby formula. MJN was the largest purchase made by Edgewood during the 4th quarter. The firm initiated a new position in MJN by acquiring approximately 2.51 million shares. In its Q4 2011 commentary, Edgewood had this to say about its recent purchase of Mead Johnson.
This company is a high quality direct play on the Chinese consumer, with the leading formula market share. Several contamination scandals involving Chinese brands over the last few years have driven customers to foreign manufacturers; Mead follows strict FDA protocols in their plants. In China a growing middle class and an increase in working women will drive demand for Mead's products.
In late December, MJN stock did fall on news of a baby's death after consuming company's Enfamil baby formula, however, it was later proved by both the Centers for Disease Control and the Food and Drug Administration that there was no evidence of contamination during the manufacture or shipping of Mead Johnson's formula. The stock, which fell on the news of the death, has since recovered.
Analysts expect the company to grow at an annual rate of 11%, slightly below the projected 14% growth rate of the industry during the next 3-5 years. Applying my estimated P/E of 27 to 2012 EPS of $3.13, my initial 12-month price target for MJN is $85 a share. A return of 15% is possible from current levels.
2) Ecolab Inc. (ECL)
Ecolab is $14.2 billion company by market capitalization. Edgewood practically initiated a new position in ECL by purchasing 2.06 million, an increase of 12,436%. ECL operates in the personal and household products industry and provides cleaning and sanitizing products, as well as pest elimination, maintenance and repair services. Edgewood is particularly interested in the water treatment system ECL is introducing to clean waste water from hydro fracturing of gas wells. ECL acquired this system with its recent acquisition of Nalco.
The company is expected to grow its earnings at an annual rate of 15%, which is on par with the broader industry. Applying a P/E of 25 to 2012 average analyst EPS estimate of $3.03, my 12-month price target of $76 is obtained. The stock offers a return of 24% from current levels.
3) Apple Inc. (AAPL)
Edgewood acquired approximately 88,000 shares of AAPL stock to take its total position to 604,504. Apple was Edgewood's 3rd largest purchase of Q4, 2011. My price target for AAPL is $677 a share. Trading at $493, AAPL is undervalued by over 37%. I have presented my analysis and fair value estimation in a recent article on AAPL and would encourage you to visit it for further details on the subject.
4) Illumina, Inc. (ILMN)
Illumina develops and manufactures life science tools and integrated systems for the analysis of genetic variation and function. This San Diego, CA based company has a market cap of $6.54 billion and is projected to increase its earnings at an annual rate of 16.5%, which is modestly higher than the projected 13.6% growth rate of the industry.
Edgewood increased its position in ILMN by 14% by buying approximately 753,000 shares. My target of $47 is obtained by applying a multiple of 32 to 2012 EPS estimate of $1.47. The stock currently trades at $54 and is overvalued by 13% in my opinion. ILMN is the least attractive name on this list in terms of valuation, and should be avoided, in my opinion.
5) Coach, Inc. (COH)
Edgewood bought approximately 308,000 shares of COH stock during Q4 2011, taking its total position to 4.34 million. Since its March 6, 2009 bottom, the stock is up a whopping 433%. China continues to be the biggest opportunity for Coach. In the last few years, the company is also aggressively tapping into the men's accessories market, and expects the men's line to make up a sizeable portion of the revenue in the next 3-5 years.
The company grew its earnings at an annual rate of 14% during the last 5 years, and is expected to grow at a 16% clip during the next 5 years. Applying my P/E estimate of 21.3 to calendar year 2012 EPS estimate of $3.78 a share, my 12-month price target of $81 is obtained. A return of 8% is possible from current levels.
As always, please do not consider this list as a "buy" list, rather, use this list as a starting point for your research. Of the companies listed above, I find AAPL and MJN particularly attractive based on fundamentals, valuation and long-term growth prospects.
Disclosure: I am long (COH).
Additional disclosure: I may initiate a position in AAPL at any time in the near future