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Bill Ackman Buys into Alexander & Baldwin (ALEX)

March 31, 2011 | About:
While taking a look at Bill Ackman’s portfolio after writing about his position in Target (TGT), I came across his recent purchase of Alexander & Baldwin (ALEX). As followers of Ackman and Pershing Square know, Ackman likes to take concentrated positions in companies and, at times, will agitate for changes. He did this with Target, although he was unsuccessful in his attempts to get on the board, and he also recently did this with J.C. Penney (JCP).

With Alexander & Baldwin, Ackman teamed up with Richard McGuire of Marcato Capital Management to buy 9.9% of the company. Ackman was the heavy lifter here and purchased 8.57% of the outstanding shares on March 21. Shares are nearly 20% higher because of the disclosure. It’s interesting that this $1.9 billion market cap company, which is relatively unknown, also has eight other guru owners. Primecap Management and Third Avenue Management each own more than 4% of the outstanding shares. Presumably they would support Ackman’s efforts.

Alexander & Baldwin owns nearly 90,000 acres of land in Hawaii and offers shipping services in the Pacific. While valuations aren’t necessarily cheap, this appears to be a break-up play by these value investors. The dividend is 2.8% and the P/E is 20. The company recently came out with poor guidance related to its shipping business because of fuel costs, which will lead to a first-quarter loss. However, they also said their real estate and agribusiness continue to have a positive outlook.

Alexander & Baldwin was founded in 1870 and is located in Honolulu, Hawaii. They operate in three segments: real estate, transportation and agribusiness. The following information on their segments comes from their website:

Real Estate - Developing real property, primarily in Hawaii | Selling residential and commercial property | Managing a portfolio of commercial/industrial properties

Transportation - Carrying freight, primarily between Pacific Coast ports, Hawaii ports and Guam | Conducting related shoreside operations | Arranging domestic intermodal transportation

Agribusiness - Growing sugar cane and producing raw sugar | Growing, marketing and distributing coffee

The company’s real estate holdings and their agribusiness holdings don’t appear to be related to the shipping business. Certainly shares are not being valued correctly with such disparate businesses, especially since commodity prices are surging. The fast rising prices of sugar and coffee would give a more focused producer a much higher valuation. The vast majority of revenue comes from the transportation segment, yet the real estate holdings make up nearly half of assets and operating profit. Not only that, but after reading through the company’s most recent conference all, it appears that the agribusiness is not being managed to its potential.

It will be interesting to see what Ackman persuades the company to do. My minimum expectation is that there would be a spin-off of at least one segment, if not both the agribusiness and real estate. With high institutional ownership and strong value-oriented owners, it would be hard to believe there will be that much of a fight by management and the board.

Disclosure: No positions

About the author:

Steven Kiel
Steven Kiel is the president and chief investment officer for Arquitos Capital Management, a Virginia-based investment management firm. He is a graduate of George Mason School of Law and a captain in the Army Reserves. He manages two spoke funds, The Freedom Fund, a value-oriented portfolio, and The Hayek Fund, a portfolio dedicated to free market principles. He can be contacted at steven.kiel@arquitos.com or through the firm's website at www.arquitos.com.

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Rating: 3.7/5 (6 votes)

Comments

avishek
Avishek - 3 years ago
i think activist investors like ackman, icahn, dan loeb, michael price and even einhorn should get together and launch an activist attempt to unlock value in msft...the balance sheet is too strong to have that much cash..may be a special dividend or share repurchase is a good idea...the stock is definitely cheap..and shareholders have virtually got nothing in the last decade...
cm1750
Cm1750 premium member - 3 years ago
MSFT has been trying to utilize cash. They initiated a $3/share special dividend a couple years ago and has a decent current 2.5% yield.

One problem is much of the cash hoard is overseas and is subject to repatriation taxes. Mgmt has tried to address this by issuing U.S. debt to buy back shares. If Congress allows a 5% repatriation tax holiday, MSFT will likely bring it back and use it to buy back undervalued shares.

The shares are cheap now, but the reason for the massive stock underperformance in the last decade is the P/E was way too high before. EPS growth has averaged 14% in the last decade. Looking at MSFT's financials without knowing the company name, one would think it deserved a 14-15x P/E.

The problem is there is no product catalyst and many money managers are hesitant to buy a stock with no price momentum. They would rather focus on GOOG, AMZN, AAPL etc.

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