Bill Ackman's hedge fund Pershing Square recently disclosed a 10.8% interest in the Hawaii-based conglomerate Alexander & Baldwin (NYSE:ALEX). Pershing Square has developed a reputation as a successful Special Situation investor with investments in Fortune Brands, JC Penney, Citigroup, General Growth Properties, bookstores and Howard Hughes Corporation. As a result, many assume that Ackman wants to unlock value in this Hawaiian operation by splitting up the company, according to the various businesses. Following his successful investment in Fortune Brands where he convinced management to break itself into three companies, this assumption makes sense and is likely a key factor in his investment thesis, but it is probably not the only factor. Ackman may also view this company as an attractive bet on continued global inflation.
The transportation and logistics group produces a large portion of the company's revenues. A&B operates an ocean freight service through its subsidiary Matson's Navigation Company. Its navigation business consists of Hawaiian, Guam, and China operations. The segment consists of eight diesel-powered ships, five steam-powered ships and four barges.
While nearly 75% of A&B's ocean transport volume came fromr its Hawaiian service, its China Service operations are a major growth driver, as China volume grew by 56% from 2009 to 2010. As the company states in its 2010 10-K:
...However, the forecast of Ocean Transportation is largely dependent on the strength of China volumes and rates and, to a lesser extent, on fuel costs, all of which have proven to be volatile in recent years.
China's rapid economic growth is generally believed to be a major cause of global inflationary pressures. Any investor in A&B's ocean transportation and logistics operation is betting that the Chinese economic growth continues and with it, global inflation.
Alexander & Baldwin, through their subsidiary A&B Properties, owns 88,298 acres in the United States. 87,470 acres are in Hawaii and 458 acres are in the U.S. Mainland.
Only 760 of the Hawaiian acres are fully entitled for Urban development while 57,910 are used for agriculture, pasture and miscellaneous. The remaining 29,170 acres have unknown investment value, as they are used for watershed and conservation.
The company's urban acreage is devoted to residential and commerical developments as well as properties with over 7.5 million square feet of leasable space. The Hawaiian operations represent 1.5 million of this square footable.
Ackman's attraction to A&B's real estate operations is likely related to his stakes in both General Growth Properties and Howard Hughes Corporation. Hawaiian properties are among Howard Hughes Corporation's most valuable assets. Ward Centers, Ala Moana Tower and the 20 acres of Maui Ranch Land could be worth as much as half of HHC's current market capitalization based on our estimation.
This segment consists of operations under the following subsidiaries: Hawaiian Commecial & Sugar Company (HC&S), Kauai Coffee Company and Kahului Trucking & Storage and Kauai Commercial Company. In 2010, the subsidiaries produced 171,8000 tons of raw sugar, 3.3 million pounds of green coffee, and trucked molasses and sugar on Maui, Kauai and the Big Island.
The company's productive sugar and coffee capacity has been a major benefit, as both commodities are trading near all-time highs. For example, from 1996 to 2008, sugar basically fluctuated around 21 cents per pound, but in the last two years, it has traded well above 36 cents per pound. As such, this company is actually a net beneficiary of continued food inflation.
Alexander & Baldwin has unique exposure to China real estate and commodities through their various businesses. While many famous investors like John Paulson, Daniel Loeb and David Einhorn haved flocked to gold and/or other assets that they hope will protect them from inflation, it looks like Ackman may have once again outdone the market by finding a sum of the parts story with upside value in the current macro environment.
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