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Bill Ackman is well known for indulging in strategic decisions of the companies he acquires stake in. Back in 2011, he bought 12% stake in Canadian Pacific (CP), and afterwards shares of this company surged from $45 to approximately $118 currently. Also, his fund Pershing Square Capital invested in Procter & Gamble (PG) last year, and since then its stock price rose from $60 to around $78 currently. These successful bets remained the top two picks of Bill Ackman's Pershing Square Capital in the latest 13F filings.

In this article, we analyze these companies to find investment opportunities since both of these companies gave significant returns in the past years. Let's see whether surging stock prices will continue or will it reverse?

Looking Towards India

In July 2013, P&G entered India's $1 billion oral care market by launching Oral-B Pro Health toothpaste. The company was expected to enter this market in 2010 but changed its plans due to increased focus on developed countries. Colgate Palmolive (CL) is a market leader in oral care in India with 56% share, and its strong product portfolio caters to Indian consumers. In this fiscal year, P&G increased its advertising expense by 30% to create awareness and building its oral care products brand image.

The Indian oral care market has been growing at a CAGR of 14% from 2011 to 2015. With the expanding Indian oral care market, we expect that both the companies have ample room to grow with their strong presence in the market. Additionally, the Indian market has significant room for further penetration since there is a vast rural population that doesn't use toothpaste. In a report, analysis showed that only 42% of India's rural population uses toothbrush. Considering these factors, we believe that P&G's new toothpaste will gain its place in the Indian oral care market, and the company's revenue will gain an upside in the coming quarters.

Last year, P&G came up with a cost reduction plan of $10 billion, under which it will initiate cost savings and restructuring. The company is expected to save around $6 billion by 2016 from its cost of goods sold, which will result in lower advertising expense, commission, discounts, etc. This should set a perfect stage for the new CEO A.G. Lafley. Under his leadership, we expect the company will continue growing as it did in his previous term.

Back on rails

In the past years, oil production from the Bakken region resulted in higher revenue opportunities for Canadian Pacific, as oil companies use Canadian Pacific's transportation network to supply oil. In the second quarter result of 2013, Canadian Pacific reported revenue of around $1.5 billion, up from $1.37 billion in the same period of last year.

To remain competitive, Canadian Pacific initiated cost reduction plans and targeted to improve its operating ratio. The company's operating ratio was 82.5 in the first quarter of 2013, which is worst among its peers in North America. The industry's average operating ratio is 67.7%. Canadian Pacific's high operating ratio has become a concern for the company, as it signifies Canadian Pacific's inability to generate profit if revenue decreases in the future. Improvement in the operating ratio is a key focus of the company, and to decrease this, it closed some of its plants in Toronto, Winnipeg, Calgary, and Chicago, and three intermodal terminals.

Also, the company is planning to extend its sidings, which will result in increasing transportation speed. Sidings refer to tracks constructed parallel to main railways lines for loading and unloading purposes. These key developments were seen in the second quarter result of 2013, reducing its operating ratio to 71.9%. We expect that the company's continuous development measures and cost savings will result in an operating ratio below 70 by the end of this fiscal year. The company's long term expected operating ratio is below 60, and we believe this target is achievable considering Canadian Pacific's aggressive approach.

Canadian Pacific generates $3,800 per carload by providing oil shipping services. In August 2013, the U.S. Development Group and Gibson energy entered into a contract to construct a loading facility unit near Hardisty, Canada with pipeline connectivity from Gibson's Hardisty Terminal. This will ease the transportation hurdle of Gibson energy and will create monetizing opportunities for Canadian Pacific, as the company's rail network will be used for the transportation purposes. As a result of this deal, Hardisty rail terminal will have shipping capacity of 140,000 barrels of oil per day, and this will add 120 cars per day traffic to Canadian Pacific's carload segment by 2014. Also, Gibson, along with the other four companies, will use this Canadian Pacific terminal, which is estimated to ship around 100,000 barrels of oil per day. We assume that this single contract will add around $166 million to the company's revenue next year.

Considering the above factor, it is expected that Canadian Pacific's EPS will grow at 27.30% in the next year, which is higher than its competitor's EPS growth of 13.2. Considering these fundamentals and valuations factors, we think the stock will show upside movement and is good investment at the current level.

Conclusion:

By entering India's vast oral care market, P&G is set to compete with Colgate Palmolive, and it will leverage its market position in this emerging country. P&G's cost reduction and restructuring plan will give upside to the stock price. Canadian Pacific will gain from its new plants beginning in the next fiscal year, and its long-term cost reduction measures will benefit it as well. Therefore, we recommend a "buy" for both of Pershing Square's top holdings.

Source: Will You Bet On The Same Stocks As Bill Ackman?