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James Li
James Li
Articles (181)  | Author's Website |

Bill Ackman Expands Chipotle Position, Cuts Zoetis

Activist investor trims 3 positions in 4th quarter

February 15, 2017 | About:

Activist investor Bill Ackman (Trades, Portfolio), founder of Pershing Square Capital Management, buys the common stock of companies and pushes for changes so that the market can realize the values of these companies. Like fellow activist investor Carl Icahn (Trades, Portfolio), Ackman buys out-of-favor companies at a discount and sells them when the companies reach their appraised value.

During fourth-quarter 2016, Ackman purchased additional shares in Chipotle Mexican Grill Inc. (NYSE:CMG) and eliminated his stake in Zoetis Inc. (NYSE:ZTS). The investor also trimmed his position in three companies: Valeant Pharmaceuticals International Inc. (NYSE:VRX), Platform Specialty Products Corp. (NYSE:PAH) and Air Products & Chemicals Inc. (NYSE:APD).

Chipotle

Ackman invested in 2,328,250 shares of Chipotle, increasing his stake in the company approximately 420%. The Mexican restaurant’s share price averaged $394.45 during fourth-quarter 2016. With this transaction, Ackman expanded his portfolio about 14.85%.

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While the company had modest profit margins and returns in 2016, Chipotle’s management expects a rebound for 2017. For fourth-quarter 2016, the restaurant reported net income of $16 million and diluted earnings per share of 55 cents, both underperforming comparative fourth-quarter 2015 values. CEO Steve Ells gave an energizing statement about 2017, saying that Chipotle will “return to a path of long-term value creation for [the company’s] shareholders.” The restaurant’s “New Year resolutions” include improving restaurant operations, rebuilding the brand and rolling out digital sales efforts. With these resolutions, Chipotle expects to increase comparable restaurant sales approximately 7% to 9% during 2017.

Chipotle has a financial strength rank of 9, suggesting a robust business outlook. The company has no debt, an Altman Z-score of 15.28 and a Beneish M-score of -3.01, suggesting Chipotle seldom experienced financial distress or manipulated its earnings results.

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Ackman owns 2,882,463 shares of Chipotle, about 10.02% of the company’s total shares outstanding as of Dec. 31, 2016. Frank Sands (Trades, Portfolio) owns 1,668,312 shares, the second-largest stake among gurus that own shares in Chipotle.

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Zoetis

Ackman sold his 2,717,719-share stake in Zoetis, trimming his portfolio by 2.61%. The animal health care company’s share price averaged $50.84 during the quarter.

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Although the company reported solid third-quarter 2016 results, Zoetis still has six medium warning signs, including slowing per-share revenue growth. The company has below-average three-year revenue growth, three-year EBITDA growth and three-year EPS growth compared to its competitors, with the latter two growth rates in the red.

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Zoetis’ stock price and price-sales ratio are currently near a five-year high, suggesting the company is moderately overvalued. As the company has decreasing value potential, Stanley Druckenmiller (Trades, Portfolio) axed his 477,900-share stake in Zoetis.

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Valeant Pharmaceuticals

Ackman pared 16.10% of his Valeant position, selling 3,476,690 shares at an average price of $18.34. The transaction reduced the investor’s portfolio 1.58%.

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Valeant’s financial strength rank is a weak 3 out of 10, suggesting a poor business outlook. The company’s cash-debt ratio is 0.02, and its Altman Z-score of 0.16 suggests moderate to severe financial distress. The company also has negative profit margins and returns: as of Feb. 15, 2017, Valeant’s operating margin and return on equity underperform 77% and 86% of global competitors respectively.

Valeant’s management lowered the company’s full-year 2016 earnings outlook as it reported a net loss of $1.22 billion during third-quarter 2016. Expected total revenues dropped approximately $0.35 billion from the previous range, while non-GAAP earnings declined about $1.30 per share.

Platform Specialty Products

Ackman knocked off 5.35% of his stake in Platform Specialty Products, selling 2,285,888 shares at an average price of $8.55.

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Like Valeant, Platform Specialty also has a modestly poor business outlook. The company’s interest coverage of 0.61 is significantly lower than Ben Graham’s threshold of 5, suggesting the company has a high debt burden. Additionally, the company’s Altman Z-score of 0.51 suggests it will likely go bankrupt within the next 48 months.

Air Products & Chemicals

Ackman sold 154,380 shares of Air Products & Chemicals, reducing his position 3.84%.

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Although the company has good financial strength and profitability, it is significantly overvalued. The company’s price-sales ratio and price-book ratio rank lower than 77% of global chemical companies and are currently near a 10-year high. Based on its price-sales valuation chart, the stock is trading near its maximum price-sales ratio over the past 10 years.

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The company’s three-year revenue growth, net-margin and return on equity are all near a 10-year low. As the company has low growth and value potential, Andreas Halvorsen (Trades, Portfolio) axed his 4,822,354-share stake in Air Products & Chemicals.

Disclosure: No positions in the companies mentioned.

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About the author:

James Li
I am an editorial assistant and researcher at GuruFocus. I have a Master's in Finance from SMU, and I enjoy writing reports on financial trends and investor portfolios. Follow me on Twitter at @JamesLiGuru!

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