Portfolio Watch

Tuesday, December 03, 2013

Why Tiger Global's Carter's Stake Is Not Child's Play


Tiger Global Management founder Charles (Chase) Coleman III made his name by betting on technology, but recently he’s made a big move into textiles.

Coleman, one of several former Julian Robertson Jr. protégés known as Tiger Cubs, disclosed in a 13G filing with the Securities and Exchange Commission on Halloween that his firm had upped its stake in children’s-apparel maker Carter’s to about 5.65 million shares, or 10.4 percent of the company. Tiger Global is the second-largest investor in the Atlanta-based company after Morgan Stanley.

The Tiger Global fund, which Coleman runs with portfolio manager Feroz Dewan, has built up its position in Carter’s over the past year, initially disclosing a 2.94 million-share stake worth $168 million, or 2.61 percent of its total portfolio, in a filing following the first quarter. As of June 30, Coleman’s firm had tacked on an additional 1 million shares, nearly doubling the position’s share of the portfolio. Tiger Global’s third-quarter 13F filing revealed a 100,000-share increase on the previous quarter, but the late-October additions really vaulted the position forward. At a November 20 price of $70 a share, Tiger Global’s stake in Carter’s was worth nearly $400 million. Coleman, who ranked No. 12 on Institutional Investor’s Alpha’s most recent Rich List after earning $350 million in 2012, worked as a tech stock analyst at Robertson’s Tiger Management before starting Tiger Global (then Tiger Technology Management) in 2001 with $25 million in seed money from his former boss. Since then Coleman has profited from investments including some high-profile and well-timed tech plays. So what lured him to a consumer company like Carter’s?

The seasoned tech investor may be attracted at least in part to the company’s recent growth: Net sales rose 14 percent in the third quarter compared with the same period in 2012, to $760 million, with international sales increasing by 21 percent, to $84 million. Despite the increase in sales, earnings per share fell by 2 percent for the quarter, though adjusted EPS climbed 10 percent. In a conference call with analysts, Carter’s CEO Michael Casey pointed to the company’s burgeoning online presence and international expansion. Thanks to a revamped online shopping experience, e-­commerce sales are expected to surpass $200 million in 2013, he said.

Still, the company’s growth potential may well be priced in, and then some: Carter’s price-to-earnings multiple of nearly 25 is almost 50 percent higher than the average equity in the S&P 500 index. A high P/E ratio can indicate that investors see potential for growth in a company. But for Piper Jaffray senior research analyst Stephanie Wissink, who began covering Carter’s in May and is neutral on the stock, the company’s P/E ratio is a little too frothy.

Carter’s has something besides growth in common with the fund's past tech investments, such as its former holding Apple: Tiger Global likes to choose the dominant player in a given sector. “Once you know Carter’s, you know the industry,” says Wissink. “They are the largest player, and in most cases they are estimated to have 30 percent-plus market share.” The company also owns the OshKosh B’gosh children’s brand.

Although growth may be Carter’s most appealing factor for Coleman and Dewan, the company also paid out quarterly dividends twice this year, in June and September, and announced a third payment in December for an equal sum of 16 cents per share. The June payment marked the first time Carter’s had issued a dividend to shareholders since the company went public ten years ago. Additionally, the board authorized share repurchase programs.

One thing is for sure: When it comes to Carter’s, Coleman’s got company. The Tiger Cubs are known to travel in packs, often piling into the same stocks at about the same time. Carter’s is no exception; other Tiger-affiliated funds holding sizable positions in the company, filings show, include Andreas Halvorsen’s Viking Global Investors, Jonathan Auerbach’s Hound Partners, John Lykouretzos’s Hoplite Capital Management and Matthew Iorio’s White Elm Capital.

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