Head of hedge fund Pershing Square Management Bill Ackman (Trades, Portfolio) hosted his first-quarter conference call Wednesday where he provided details about his many losses and few gains in the past several quarters. He also outlined developments at his top investments and where he sees value versus the market.
Ackman is down 25.6% for the first quarter with ill-fated bets like Valeant (VRX, Financial) and a bet against Herbalife (HLF, Financial), which he defends in the call. Due to a sell of Mondelez and transaction with Air Products and Chemicals, his fund is holding substantial cash.
Intro
Loss contributors
Valeant – 13-16%
Mondelez (MDLZ, Financial) – 2.9-3.5%
Platform Specialty Products Corp. (PAH, Financial) – 1.2-1.4%
Herbalife (HLF, Financial) – 1.2-1.4%
Zoetis (ZTS, Financial) – 1.0-1.2%
Positive contributors
Air Products and Chemicals (APD, Financial) – 1.2-1.4%
Restaurant Brands (QSR, Financial) – 0.2-0.5%
Canadian Pacific Railway (CP, Financial) – 1%
Valeant
- Valeant did not start out as an active investment. Pershing began involvement in 2014 helping with acquisition of Allergan and developed respect for team and business model. They took a passive stake in early 2015.
- Press has not noted that Pershing has not been involved in model of the business or decisions and had no influence or board members. Events of past four to five months catalyzed Pershing taking two seats on board.
- A very important development is the search for a new CEO. They have a handful of top candidates and believe new CEOs want to come in after mismanagement and stock price deterioration.
- Stock is down because investors have lost confidence due to financial statements, management and governance. As these issues are addressed, the stock will go up.
- “Interesting thing is it’s much easier to restore confidence by making those kinds of changes. And we expect fairly rapid recover in the stock price on the basis of restoring confidence in the business.”
- The top priority is getting the 10-K filed before April 29, which will make the stock “investable.” It trades Wednesday at 3x earnings, a “remarkably low valuation” for a business of this quality.
- Company ha given Q1 guidance but they are working with it to ensure it gives sufficient detail to value the business.
Air Products & Chemicals
- Pershing has invested for two and a half years. They took a 10% stake and added several directors.
- It is an extremely high-quality, predictable, free cash flow-generative, dominant business under good management. New CEO, joined 18 months ago, has done a “remarkable” job.
- Only negative point: The capital structure is not ideally matched to a business of such stability. Pershing thinks in some ways it is overcapitalized because counter parties take a market point of view that says since other industrial gas companies are single-A rated entities, they need to maintain a similar kind of capital structure.
- Therefore, it earns attractive returns on assets but operates with a capital structure you would expect in a much riskier kind of business.
- Pershing recently sold two-thirds of its stake to purchase “deep-in-the-money” call options with a two-year term and strike price of $67 per share. The stock trades around $145, meaning they are about 55% in the money.
- The structure allows Pershing to earn dividends and get a higher yield on a smaller investment, freeing up capital for other opportunities.
Canadian Pacific Railway
- Company is high-quality infrastructure-like assets suffering in the past year due to top-line revenue trends resulting from macroeconomic weakness.
- The diversified business model helps it hold up well.
- Volumes were down 2% over the last year despite macro weakness, it improved operating margins and had an operating ratio of 61%, the second best in the industry. It also repurchased 8% of its shares and that with margin improvement increased EPS 19% despite 2% revenue decline.
- Though overshadowed by weakness in rail volumes and top-line growth trajectories in the industry, Pershing continues to believe it is an attractive investment.
- CP has proposed a merger with Norfolk Southern Pershing believes is pro-competitive and good for the rail industry and shipper community. It would also create addition value for CP.
- The big question is whether it can happen or not.
Howard Hughes
- The company is doing extremely well. Stock price is down because investors may be overly focused on assets in Houston, though only a relatively small part is in Houston, and Houston is doing fine. Leasing and homesale velocity is down, but the long-term value of assets hasn’t changed materially. Woodlands occupancy is one of the highest in Houston.
- Significant events this year: Beginning in Q4 it will change from a cash consumer to a cash generator. The company is taking 20% down payments on condo sales and don’t collect the rest until they deliver the units.
- The first unit deliveries are slated for fourth-quarter 2017 as they get certificates of occupancies and as buildings get completed.
- Hawaii is doing well. They own buildings that are the best products on the market. Net operating income continues to increase as land gets coverted to income-producing assets and assets get leased up.
- The company is going to take a more forward foot in telling its story. No analysts cover it and it has no quarterly conference calls but will get more coverage and after five years in business it is time to tell its story.
Herbalife short
- The company changed their disclosure about the FTC in their 10-K on Feb 25.
- Previously they said they were responding and providing information. Now they said they’re in discussions about a possible resolution.
- The market took that as they were getting a slap on the wrist, and the price went up.
- Pershing doesn’t agree. They think Herbalife was resetting expectations for something worse. They were telling shareholders they expect a successful outcome, and they’re no longer saying that.
- In a March 8-K they admitted large errors in their disclosure over three quarters.
- Last summer they started a new metric, active new members, but did not define what they meant and only showed changes in percentage, not actual numbers.
- Magnitude of error: they overstated their Q3 number for 41 times and fourth quarter by 2.3 times. Pershing said it suggests how fake and inaccurate their numbers are.
- Also, when they talk about “active new members” they don’t tell how many members become inactive – the church rate. The last time they disclosed that was in 2005 when the rate was 90% within the first year.
- Stock trades at 15 times midpoint of management’s guidance and the stock is up this year. Positioned by analysts because of 10-K to go up, but in the short-term Pershing sees very little upside at the current valuation, so even if they do nothing, the risk-reward is compelling.
Zoetis
- Pershing likes Zoetis because it has the benefits of a pharmaceutical company in terms of high margins and rapid growth but with no downsides like medicare and Medicaid reimbursement and no politics around animal health.
- They think it is a very, very high-quality growth company with 6-7% top-line growth.
- There is also little generic risk because the products are small and not attractive for generics makers.
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