Kraft Foods And 4 Other Top Holdings By Bill Ackman

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 |  Includes: BEAM, C, CP, JCP, MDLZ
by: Alejandro Schuvaks

Bill Ackman is a long term value investor who founded the hedge fund Pershing Square Capital Management LP and now serves as its CEO. Mr. Ackman holds a Bachelor of Arts degree magna cum laude from Harvard College and received an MBA from Harvard Business School in 1992. Before funding Pershing, Ackman co-founded Gotham Partners with a Harvard graduate in 1992. By 1998, the firm had more than $500 million in assets. A few years later, the NY Attorney General investigated whether the firm was engaged in illegal practices for publishing its own research reports on stocks where it held a long or short term position. The litigation concluded with no wrongdoing on the part of the firm.

Turning back to Ackman´s current situation, in December 2007, his funds owned a 10% stake in Target Corporation, valued at $4.2 billion, and now they own 7.8%. In 2010, his funds held a 28% stake in Borders Group and that same year, Ackman reported that he would finance a buyout of Barnes & Noble for $900m.

What about Ackman´s preference for long investments? He considers that this position enables him to profit from short term downward moves in prices. Actually, he is successful at special situation investments. Bill Ackman's returns have displayed option-like characteristics in 2009 and 2010. His investment in General Growth Properties is almost as large as John Paulson´s subprime shorts. In 2009, his recommendation of the GGP stock at the Ira Sohn Conference brought stock returns of over 1,000%. This helped Ackman to enjoy a great 2010 with a 29.7% return.

From an individual investor´s point of view, I think it is extremely interesting to focus on stocks that are large holdings in Bill Ackman´s portfolio. I analyzed them and found the reasons why Mr. Ackman could have been attracted to invest. I usually look for companies that I can understand, with advantageous long-term prospects that are managed by competent people and most importantly, they are available at attractive prices.

Canadian Pacific Railway Limited (NYSE:CP): CP is a firm that operates a transcontinental railway in Canada and the US. It operates through subsidiaries and currently owns about 10,700 miles of track. 4,700 miles of track are jointly owned, leased or operated under trackage rights. 6,200 miles of track are located in Western Canada, 2,200 miles in Eastern Canada, 5,800 miles in the United States Midwest and 1,200 miles in the United States Northeast. In terms of revenue, Canadian Pacific receives revenue from Freight transport (98% in 2010) and other services (2%).

Canadian Pacific is permanently working to improve its network capabilities that will enable it to run longer and heavier trains and deliver on-time performance and secondly, because of the company´s product lines. As regards the first reason, for 2012 it expects to upgrade and install new sidetracks and increase train length by 11% in 2013. Furthermore, the company planned long-term investments of about C$ 2.3 billion for 2011 to 2028 with almost $1.0 billion this year on infrastructural developments. These include track maintenance and expansion programs, productivity initiatives, network enhancement upgrade, information technology systems, Positive Train Control (NASDAQ:PTC) implementation. In addition, the company expects to purchase 91 new fuel-efficient locomotives by the end of Q1 2012 and increase fuel efficiency between 1 and 2%. These investments will certainly increase profitability and improve the company´s structure.

As regards Canadian Pacific product lines, management expects automotives to recover in the fourth quarter and the year to come with the return of production to normal levels. Although the growth rate will increase slowly, with sales around $13 million for next year, fuel prices will remain favorable for the company´s oil sands transport business. Management expects the Marcellus Shale natural gas production unit and Alberta's Industrial Heartland area, Canada's largest hydrocarbon processing unit to support revenue and market share gains in the upcoming year. Forest Products are expected grow with the increasing demand for pulp and modest growth in lumber in China, offsetting a lull in Grain shipments due to softness in U.S. wheat production. Strong domestic intermodal shipment, owing to truckload conversion to rail Intermodal is expected to continue.

Canadian Pacific´s current net profit margin is 11.01%, currently lower than its 2010 margin of 13.06%. I do not like when companies have lower profit margins than the past. That could be a reason to analyze why that happened. The current return on equity for CP is 12.03%, lower than the +20% standard I look for in companies I invest but higher than its 2010 average ROE of 11.29%. In terms of income and revenue growth, Canadian Pacific has a 3 year average revenue growth of 1.63% and a 3 year net income average growth of -2.09%. Its current revenue year over year growth is 3.94%, lower than its 2010 revenue growth of 13.15%. I do not like when the current revenue growth is less than the past year. It generally shows that business is decelerating for some reason. The current net income year over year growth is -12.44%, lower than its 2010 net income y/y growth of 18.36%. I do not like when current net income growth is less than the past year. I look for companies that increase both profits and revenues.

In terms of Valuation Ratios, Canadian Pacific is trading at a Price/Book of 2.8x, a Price/Sales of 2.5x and a Price/Cash Flow of 25.1x in comparison to its industry averages of 2.6x Book, 2.4x Sales and 9.1x Cash Flow. It is essential to analyze the current valuation of Canadian Pacific Railway Limited and check how it is trading in relation to its peer group.

It is a must to analyze CP´s current valuation in relation to its peers. Canadian Pacific´s current trailing 12-month earnings multiple is 20.1x while the peers´ group is 17.3x. In the last five year period, shares have been trading between 7.2x and 22.6x. This shows that the stock is trading above the peer group and S&P 500 benchmark based on 2011 earnings estimates.

This situation clearly shows that CP is correctly positioned to benefit from strong productivity and an increase volume in each of its business segments, the Coal, Automotive, Sulphur and Fertilizers, and Intermodal segments. Most importantly, Canadian Pacific has a strong balance sheet that provides flexibility and the ability to offer dividends to shareholders. Unfortunately, there is skepticism due to the rise in fuel prices, competition, the strong Canadian dollar, a unionized workforce, and regulatory pressures.

In terms of financial health, CP holds a relatively high debt load. Its debt/capital ratio is around 0.5 and it is considered one of the highest among Class I rails. There is no need to be concern about this situation given CP´s decent 3.8 times EBIT/interest coverage. But, this situation must be followed, especially, after the latter degraded from 4.3 times in 2010.

J.C. Penney Company Inc. (NYSE:JCP): J.C. Penney Company, Inc is a company that offers merchandise and services to customers through department stores, catalogs and website. It operates through its wholly-owned subsidiary, J.C. Penney Corporation Inc. The company primarily sells family apparel, footwear, accessories, fine and fashion jewelry, beauty products and home furnishings. The department stores also provide services such as styling salon, optical portrait photography and custom decorating.

JCP is a diversified company that with compelling private and national brands, marketing campaigns and point-of-sale technology initiatives together with effective cost and inventory management have been able to improve sales and margin trends. Most importantly, sales are expected to grow and thus boost the firm´s market share. The company has not only set up stores in large shopping malls, but it has also started to set up off-mall stores, which are projected to grow higher and bring better margins than mall-based stores.

JCP´s current net profit margin is 2.19%, currently higher than its 2010 margin of 1.43%. I like companies that increased profit margins in comparison to other years. It is essential to know the reason why that happened. The company´s current return on equity is 7.60%, lower than the +20% standard I look for in companies I invest but higher than its 2010 average ROE of 5.62%. In terms of income and revenue growth, JCP has a 3 year average revenue growth of -3.66% and a 3 year net income average growth of -29.52%. Its current revenue year over year growth is 1.16%, higher than its 2010 revenue growth of -4.10%. The fact that revenue increased from last year shows me that the business is performing well. The current net income year over year growth is 54-98%, higher than its 2010 net income y/y growth of -56.12%. I like when the net income growth is higher than in the past.

In terms of Valuation Ratios, JCP is trading at a Price/Book of 1.7x, a Price/Sales of 0.5x and a Price/Cash Flow of 8.4x in comparison to its industry averages of 2.1x Book, 0.5x Sales and 9.1x Cash Flow. It is essential to analyze the current valuation of J.C. Penney Company Inc. and check how it is trading in relation to its peer group.

J.C. Penney has been losing its foothold in the market to other retail chains, despite its diversified supplier base, compelling merchandise, marketing campaigns and technological initiatives. Based on the situation, JCP has made every effort to improve and thus, it acquired a 16.6% stake in Martha Stewart Living. Nevertheless, there is still concern about the changing consumer behavior and the slow recovery of the economy.

Specifically talking about valuation, JCP´s current trailing 12-month earnings multiple is 21.4x while the industry´s average is 16.8x and S&P 500´s average is 17.1x. In the last five year period, the company´s shares have been trading in a range of 5.4x and 30.6x trailing 12-month earnings. It can be noticed that the shares are trading at a premium vis-à-vis its peer group.

Financially speaking, J.C. Penney holds $3.1 billion in long-term debt and $2.4 billion in estimated lease obligations. The company should create $1.5 billion of EBITDA on $18 billion of revenue in 2011 to generate an EBITDAR coverage ratio of 3.5 times. These figures are reasonable for a company like JCP. It is considered to be financially healthy.

Beam Inc. (NYSE:BEAM): Beam Inc. is a company that provides spirits such as bourbon, liqueur, rye, vodka, scotch, rum, gin, brandy, cognac, cordials, tequila, and sherry across the globe. This company is located at Deerfield, Illinois and is formerly known as Fortune Brands.

Beam is the fourth-largest spirit firm. Its portfolio includes 10 of the top 100 global premium spirits brands. In terms of bourbon, the premium brands are Jim Beam and Maker´s Mark. But the firm's Canadian Club, Sauza, Teacher's, and Courvoisier brands also have a sizable presence in their respective categories. The six of them account for 60% of total revenue and are the primary drivers of profitability and cash flow generation. Beam is also focusing of new brands, such as Skinnygirl ready-to drink products, Cruzan rum, and Effen vodka. Although they are not premium brands they generate opportunities for innovation and growth in both developed and emerging markets.

Also, the spirits industry is an industry of opportunities for companies that know how to profit from them and maintain a portfolio of brands with leading market presence. In this industry, customers tend to remain loyal to their brand of choice. Of course, this enables companies, like Beam to introduce innovative products and maintain steady cash flows. In terms of premium brands, companies like Beam have benefited by the consumers´ trade up and payment of higher prices for quality of their preferable brand. Most importantly, companies that know how to capitalize on those trends could benefit from repeat customer purchases at premium price points. There is no doubt Beam will profit from this situation, especially thanks to its leading position in bourbon and other top spirits.

BEAM´s current net profit margin is 39.44%, currently higher than its 2010 margin of 6.83%. I like companies that increased profit margins in comparison to other years. It is essential to know the reason why that happened. The current return on equity of Beam is 18.67%, lower than the +20% standard I look for in companies I invest but higher than its 2010 average ROE of 9.07%. In terms of income and revenue growth, Beam has a 3 year average revenue growth of -32.78% and a 3 year net income average growth of 43.09%. Its current revenue year over year growth is 10.32%, higher than its 2010 revenue growth of -68.71%. The fact that revenue increased from last year shows me that the business is performing well. The current net income year over year growth is 86.92%, lower than its 2010 net income y/y growth of 100.82%. I do not like when current net income growth is less than the past year. I look for companies that increase both profits and revenues.

In terms of Valuation Ratios, Beam is trading at a Price/Book of 2.2x, a Price/Sales of 3.9x and a Price/Cash Flow of 20.0x in comparison to its industry averages of 5.2x Book, 2.7x Sales and 13.6x Cash Flow. It is essential to analyze the current valuation of Beam Inc. and check how it is trading in relation to its peer group.

Prior to the separation, Four Brands had a debt/EBITDA of 4.2 times. It was quite leveraged. As a result, the company spent part of its earnings to repay the debt. After splitting off the non-alcoholic business segments, Beam will try to reduce the debt ratio to $1.7 billion and the adjusted net debt/EBITDA to 2.5 times by the end of 2011.

Kraft Foods Inc (KFT): Kraft is one of the largest food and beverage companies in the US and second worldwide. It offers a range of products that include biscuits, confectionery, beverages, cheese, grocery and convenient meals. Furthermore, the company operates through three geographic units: Kraft North America (representing 46.3% of revenues and 54.7% of operating income in 2011), Kraft Foods Europe (representing 24.6% of revenues and 18.4% of operating income in 2011) and Kraft Foods Developing Markets (representing 29.1% of revenues and 26.9% of operating income in 2011).

KFT is trying to expand in developing markets, including China, Brazil, India, Mexico, Russia and Southeast Asia. The idea of expanding in these countries is encouraged by their growth nature and the fact that these countries receive support in terms of infrastructure investments and marketing outlays. Most importantly, management has decided to close certain business (Veryfine, Fruit2O, and Post cereals) in order to make the product portfolio more competitive. In 2011, the developing market was the strongest performing segment for the company and is expected to be the key growth driver in 2012.

The acquisition of Cadbury has placed the company in higher growth geographies and categories. Actually, Cadbury has created new channels for sale for the company in developing markets such as India, Brazil and Mexico. In terms of figures, the acquisition is expected to generate annual cost savings of approximately $800 million by the end of 2012 exceeding the original target of $750 million. Moreover, the company has derived revenue synergies of $400 million from the acquisition until the end of 2011 while the company´s goal is to generate total revenue synergies of $1 billion from the acquisition.

Kraft´s current net profit margin is 6.49%, currently lower than its 2010 margin of 8.36%. I do not like when companies have lower profit margins than the past. That could be a reason to analyze why that happened. The current return on equity for Kraft is 9.93%, lower than the +20% standard I look for in companies I invest and lower than its 2010 average ROE of 13.33%. In terms of income and revenue growth, KFT has a 3 year average revenue growth of 9.04% and a 3 year net income average growth of 6.94%. Its current revenue year over year growth is 10.48%, lower than its 2010 revenue growth of 26.97%. I do not like when the current revenue growth is less than the past year. It generally shows that business is decelerating for some reason. The current net income year over year growth is -14.27%, lower than its 2010 net income y/y growth of 36.18%. I do not like when current net income growth is less than the past year. I look for companies that increase both profits and revenues.

In terms of Valuation Ratios, Kraft is trading at a Price/Book of 1.9x, a Price/Sales of 1.2x and a Price/Cash Flow of 15.0x in comparison to its industry averages of 3.6x Book, 1.1x Sales and 14.1x Cash Flow. It is essential to analyze the current valuation of Kraft Food and check how it is trading in relation to its peer group.

Valuation is a very important issue to analyze in every company. Kraft is very interesting with a continued cost management, price increases and expansion strategy into emerging markets and the permanent momentum of its premium brands. The split of the North American business should enable Kraft to focus on strategic priorities and allocate resources optimally. Nevertheless, there is concern about input costs that are rising and the vulnerability in currency translations. In terms of estimations, Kraft shares currently trade at 15.2x earnings estimate for 2012. This represents a 64.8% discount vis-à-vis the industry average of 43.2. As regards the price-to-book valuation, shares trade at 1.9x, a 44.1% discount to the industry average of 3.4x. The trailing 12-month ROE is 10.3% exceeding the industry average of 9.1%.

Financially speaking, there is no doubt about the company´s ability to repay its debt, given the acquisition of Cadbury, which has provided a significant amount of leverage and the solid cash flows it generates. For the next five-year period, the company is expected to have a debt/capital ratio of 0.4 and earnings before interest and taxes are expected to cover interest expense 3.7 times. The company is trying to remain a solid investment-grade credit, but the credit rating will be tested when additional details surface on the capital structure of the individual units are given.

Citigroup Inc (NYSE:C): Citigroup is a diversified financial services holding company that provides financial products and services such as consumer banking and credit, corporate and investment banking, securities brokerage and wealth management to consumers, corporations, governments and institutions. With almost 200 million customer accounts, it operates in more than 160 countries and jurisdictions.

In February 2009, Citigroup restructured its businesses into three principal segments: Citicorp (83%), Citi Holdings (16%) and Corporate/Other (1%).

C has an encouraging business model generated from outside the U.S. Its presence in more than 160 countries meets clients and consumers global and local needs. Today, despite the economic slowdown, Citigroup is making every effort to continue growing in the international markets. It is trying to expand and catch opportunities in emerging markets too. Another reason for buying C may have been the firm´s intention to control expenses to improve its outlook. Management expects to reduce full-year operating expenses in 2012, excluding the impact of foreign exchange and any significant episodic items, by $2.5 billion to $3 billion from the 2011 expense level.

Citigroup´s current net profit margin is 14.12%, currently higher than its 2010 margin of 12.24%. I like companies that increased profit margins in comparison to other years. It is essential to know the reason why that happened. The current return on equity of C is 6.50%, lower than the +20% standard I look for in companies I invest and lower than its 2010 average ROE of 6.72%. In terms of income and revenue growth, Citigroup has a 3 year average revenue growth of 14.94% and no 3 year net income average growth reported. Its current revenue year over year growth is -9.52%, lower than its 2010 revenue growth of 7.87%. I do not like when the current revenue growth is less than the past year. It generally shows that the business is decelerating for some reason. The current net income year over year growth is 4.39%, but it cannot be compared with the prior year as no net income year over year has been reported for 2010.

In terms of Valuation Ratios, Citigroup is trading at a Price/Book of 0.6x, a Price/Sales of 1.3x and a Price/Cash Flow of 2.3x in comparison to its industry averages of 0.7x Book, 1.8x Sales and 2.2x Cash Flow. It is essential to analyze the current valuation of Citigroup Inc. and check how it is trading in relation to its peer group

In terms of valuation, Citigroup shares currently trade at 8.3x our 2012 earnings estimate, a 22% discount to the industry average. As regards the price-to-book valuation, the shares trade at 30% discount to the industry average. This valuation looks reasonable, given a trailing 12-month ROE of 6.3% that is 29% below the industry average.

Financially speaking, C is in good health. It has a tangible common equity ratio of 7.5% and an allowance for loan losses sufficient to cover more than 5% of its loan book. The company is also now consistently profitable.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.