Bill Ackman (Trades, Portfolio) has been cutting back on Canadian Pacific (CP, Financial) by selling a massive amount of shares as shown by GuruFocus' Real Time Picks. The move is somewhat surprising because on the recent quarterly call, the firm’s outlook was very bullish:
The railroad business suffered from some of the macro weakness. It's a diversified business, and it holds up well as a whole. Volumes were down only 2% for the year. It makes great progress on improving operating margins, and it repurchased 8% of shares over the last year. EPS growth of 19% for the year despite muted top line growth.
Improvements are overshadowed by weakness in rail weakness. It remains an attractive investment. It guided for 10% EPS growth over the next year and, given the disclosures from the company, the guidance is achievable. It has a superb management team. The merger with Norfolk Southern (NSC) would create enormous additional value for shareholders, but it is uncertain whether it will happen. More news will come out in the next month or so.
There are a few reasons why I think the Ackman cut back. First, in mid-April the U.S. army started to look into the merger along with the Justice Department. This greatly discouraged management to explore a deal further and they basically threw the towel in on the merger.
Second, Ackman had a terrible and widely publicized start to 2016. It's likely he has been facing some redemption requests, even though clients can only withdraw limited amounts of their money in the firm over a quarter. I believe he may have a need to raise a bit of cash to satisfy withdrawal requests.
Third, other hedge funds are circling for blood and likely anticipate some liquidations by Ackman. By shorting companies Ackman has in the portfolio, they can try to effectively front-run him. Because Pershing Square is a massive fund with a concentrated portfolio, it is potentially hard for the firm to trade out without an impact on the market. A defensive strategy could be to liquidate the most liquid of holdings. I believe that may play a role in Ackman selling some Mondelez (MDLZ, Financial) and now Canadian Pacific, instead of holdings in the smaller companies in portfolio.
Finally, without a catalyst like an M&A transaction and the company facing near term headwinds, it is hard to see how to get a great annualized return (like 15%) from a company that just went through several years of major cost cutting and right-sizing. It now trades at a P/E of 19x, P/B of 5.5x and P/FCF of 14x. Its balance sheet is already fairly efficient with $6.5 billion of debt versus $2.5 billion of EBITDA. Ackman appears to be refocusing on his core activist expertise and there isn’t that much left to achieve here.
