Bill Ackman is a long term value investor, taking advantage of short term downward moves in prices. He is particularly successful at special situations investments. William Ackman´s Pershing Square has a very concentrated portfolio. Bill Ackman´s returns have displayed option-like characteristics in 2009 and 2010. His General Growth Properties investment is almost as big as John Paulson´s subprime shorts. In May 2009, he recommended GGP stock at the Ira Sohn Conference and the stock returned more than 1000% since then. As a result of that investment, Ackman had a great 2010, returning 29.7%. I think it is essential for investors to analyze Pershing Square´s top holdings.
Canadian Pacific Railway (CP)
Ackman holds a concentrated 23.32% position in CP with no activity in the last quarter. I like the prospects for the railroad industry. I think that many rail investors may be focused too narrowly on coal, overlooking a potential favorable agricultural products story in the second half of the year. It is important to remark that the USDA is projecting a record corn harvest this year, something that could keep a lid on pricing and stimulate demand from China. Canadian Pacific has been in the shadow of Canadian National Railway for over a decade now, but appears about to move up. It holds a number of key lines, is less dependent on coal than many, and the rise of activists like Bill Ackman point CP towards a 10-15% expansion. Mark Adams, editor of Warren-Trades newsletter, likes CP. I recommend to follow his recommendations.
Going forward, Canadian Pacific seeks to reward its shareholders though increased dividend payments. Over the last couple of years, the company has increased its annual dividend by an average of 10%. For the year, the company increased its quarterly dividend to C$0.35 from C$0.30 paid last year, representing a 16.7% hike. I believe the increased dividend stems from the company´s confidence in delivering strong earnings as economic growth accelerates. Recently, the company witnessed higher management changes that included the departure of chief executive officer Fred Green, Chairman John Cleghorn and other board members. I believe that shareholders have faith in Ackman, who proposed these changes previously and expect the changes in top management to be favorable for the profitability of the company. I recommend CP because the company has solid fundamentals and management changes will reward shareholders.
Procter & Gamble (PG)
Bill Ackman initiated a position in PG that represents 17.89% of Pershing Square's portfolio. The recession of 2008 and the ongoing Euro-zone crisis have led to the possibility of protracted economic growth in the developed countries. The majority of P&G's revenues are from these countries, but there has been a shift in trend towards developing countries in recent years. In FY 2012, North America (US and Canada) and Western Europe together made up 58% of total revenues, compared to 62% in FY 2010. This trend may increase the company's exposure to risks specific to developing markets in the future.
Apart from a few exceptions, almost all of P&G's products have seen declining volumes in the developed regions in recent years. This is due to the combined effects of reduced consumer spending and increased product prices. Despite the relative underperformance of the company´s shares, PG´s stock trades very close to the peer group forward P/E multiples based upon consensus earnings projections. The stock is currently valued at 17.1 times projected 2012 earnings of $3.90, slightly below the average peer group multiple of 17.6 times, and 15.8 times projected 2013 earnings of $4.22, compared with the 2013 peer group P/E multiple of 16.2 times.
I do not recommend an investment in PG until there is clarity that PG´s core businesses are starting to turn around.
General Growth Properties (GGP)
Ackman holds a 17% position in GGP. The fund kept its GGP position unchanged. General Growth is a set of retail and other rental properties - primarily regional malls - in the U.S., as well as some assets in Brazil. After the spinoffs and other asset divestitures, some investors are bullish on the company's prospects, given its refocusing on core assets and overall improvement in the real estate environment.
One interesting area where the company is making big moves is in mall anchor-store real estate. Earlier this year, Sears Holdings announced it would sell 11 stores to GGP for $270 million. Sears will get much-needed cash from the move, while General Growth ends up with some premium retail space.
For General Growth to keep improving, it needs to ramp up its growth more quickly and try to focus on becoming profitable. That may require a further turn in the real estate market, but when it comes, General Growth could see a lot of upside.
Ackman holds 0.4% of his portfolio in C and he sold almost the entire position in the last quarter. Citigroup is one of the best reserved banks. At the end of the second quarter 2012, book value per share was $62.61 and tangible book value per share was $51.81, 4% and 6% increases, respectively, versus the prior year period end. Citigroup's Tier 1 Capital Ratio was 14.4%, its Basel I Tier 1 Common Ratio was 12.7%, and its estimated Basel III Tier 1 Common Ratio was 7.9%. I think Citigroup shares are inexpensive at just 0.58 Price/Tangible Book Vale.
The company's firm-wide allowances are sufficient for covering anticipated future losses. The credit quality metrics also continued to improve during the first half of 2012. Going forward, the company is expected to benefit from an overall improvement in credit quality, given the current economic environment as well as a reduction in overall problem assets, particularly at Citi Holdings. Loan loss reserve releases are expected to continue in 2012. Citigroup´s core business, Citicorp, remains very attractive, and its unique franchise allows clients to access high growth foreign markets. The segment has reported consistent revenues despite the financial turmoil in the past few years. Going forward, the company intends to capitalize on the enormous strength of this franchise, once the ongoing de-leveraging is accomplished.
I recommend to invest in C shares. I think that the stock is undervalued and Citi will normalize its earnings in the mid-term.
JC Penney (JCP)
Ackman holds 12% of his portfolio in JCP. He kept that position unchanged. I think that JCP is a compelling turnaround story. The company´s 2Q sales and earnings were disappointingly weak, but I remain optimistic about its turnaround strategy. Management is effectively reducing its cost structure and expects to end the fiscal year with more than $1 billion in cash on the balance sheet. In addition, the first wave of in-store "shops" were opened in a timely manner, and new Levi´s shops appear to be performing well.
In the last earnings report, JCP reported Q2 loss of $0.37 per share, $0.30 worse than the Capital IQ Consensus Estimate of ($0.07) while revenues fell 22.6% year/year to $3.02 billion vs the $3.21 billion consensus. The company has now completed the first six months of its transformation plan and while business continues to be softer than anticipated, I am confident that the transformation of JCP is on track. The transition from a highly promotional business model to one based on everyday value will take time but I think that in the long term, investors will be rewarded.
Other stocks that Ackman invested
I think Beam could be an attractive target for a global spirits giant, such as Diageo or Pernod Ricard, seeking to expand its bourbon offerings. Beam is the leader in this type of alcoholic beverage. I like this Pershing Square pick. Ackman holds 17% of his portfolio in BEAM.
Ackman also holds 2.55% of his portfolio in Alexander & Baldwin. ALEX is a combination of three disparate businesses - ocean transportation and logistics services, real estate and agribusiness. The separation of the transportation and land businesses took place on June 29 after the company's board approved the plan on June 8. The transportation spin-off will begin trading on the NYSE on July 2 as Matson Inc. Both companies will have more than $1 billion in assets, 1,000 employees and strong cash flow. Ackman purchased 8.57% of ALEX in the first quarter of 2011, which he disclosed through a 13D (activist) filing. When he bought the shares, the company had just issued poor guidance for its shipping business, expecting a first-quarter loss due to high fuel prices. The other two businesses, real estate and agribusiness, both had positive outlooks. In the first quarter of 2012, ALEX´s Ocean Transportation revenue increased 17 percent from the year-ago quarter due primarily to higher rates reflecting higher fuel prices, as well as volume growth. Operating profit increased 50%. I think that ALEX´s turnaround strategy is going better than expected.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.