Bill Ackman Comments on Top Holdings: Target Corp., EMC Corp., Automatic Data Processing Inc., McDonald's Corp.

Bill Ackman Comments on Top Holdings:TGT, EMC, ADP, MCD

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Sep 25, 2009
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(GuruFocus, September 25, 2009) Investment Guru, Manager of Pershing Square funds Bill Ackman sent out his latest Quarterly Letter to investors. It is a bit overdue because the man insists on write the letter himself. Recalling the incident he fought so hard and failed to nominate a different slate of BOD in a proxy fight with Target Corp. management, the activism Investment Guru certainly set an example for what he preaches in terms of shareholders’ right.


And he has done a good job for his shareholders too. As he said in the letter: “The Pershing Square funds underperformed most major market indexes for the second quarter of 2009 while substantially outperforming most major market indexes for the year to date and since inception.”


We are delighted because he shared his own thoughts on his top positions:


No. 1: Target Corp. (TGT, Financial), Weightings: 43.28% - 24,873,329 Shares


Target Corporation operates large-format general merchandise and food discount stores in the United States which include Target and SuperTarget stores. Target Corp. has a market cap of $35.85 billion; its shares were traded at around $47.65 with a P/E ratio of 17.2 and P/S ratio of 0.6. The dividend yield of Target Corp. stocks is 1.4%. Target Corp. had an annual average earning growth of 11.6% over the past 10 years. GuruFocus rated Target Corp. the business predictability rank of 5-star.


Ackman reported he owns 24.8 million common stocks and some call option on the stock.


Here is his latest thoughts on the stock according to the latest quarterly report:
In last quarter’s letter, we expressed our belief that the proxy contest with Target had (1) catalyzed management to seriously consider exiting the credit and funding risk associated with its credit card operation, (2) highlighted the undervaluation of the company, and (3) would improve the company’s governance and board composition, and (4) make Target a more open and responsive company. During the proxy contest which began on March 16 th , Target stock rose by more than 50%. In recent weeks, the stock has continued to appreciate, driven by better than- expected second quarter operating performance and, most recently, by the company’s announcement that it would seek to declassify its staggered board. We expect that Target will continue to deliver on the promises it made during the proxy contest which will inure to thebenefit of long-term shareholders.


No. 2: EMC Corp. (EMC, Financial), Weightings: 33.89% - 58,678,780 Shares


EMC Corporation and its subsidiaries design manufacture market and support a wide range of hardware and software products and provide services for the storage management protection and sharing of electronic information. These integrated solutions enable organizations to create an enterprise information infrastructure or what EMC calls an E-Infostructure. Emc Corp. has a market cap of $34.7 billion; its shares were traded at around $17.16 with a P/E ratio of 25.3 and P/S ratio of 2.3. Emc Corp. had an annual average earning growth of 39.1% over the past 5 years.


Ackman owns 58.7 million shares of EMC.


Here is his latest thoughts on the stock according to the latest quarterly report:
Our second largest investment is our stake in EMC. We invested in EMC because of the high quality nature of the company’s two principal business lines – the Information Infrastructure and Virtual Infrastructure businesses – and our ability to acquire a position at a substantial discount to our estimate of fair value.


Each of EMC’s Information Infrastructure’s three segments – Information Storage, Content Management and Archiving, and RSA Information Security – leads the market in which it competes. Because of the extremely high compound growth rate in data globally – estimated by industry experts at 60+% per annum; (think saved YouTube videos and regulatory requirements to preserve documents and data), we believe that demand for data storage over the long-term is largely insensitive to the economy. As a result, we expect that EMC’s dominant market position in Information Infrastructure will continue to allow it to generate growing, and predictable free cash flow from new product sales, recurring maintenance and warranty revenues, and the sale of consumables. The company also benefits because of its substantial operating leverage from economies of scale, large barriers to entry, and economies of scope, where the breadth of the company’s product offering is a significant competitive advantage.


EMC’s customers are diverse by industry and geography and enjoy efficiencies from


concentrating their infrastructure spending on a small number of market leading vendors such as EMC. Its customers are also highly risk averse, as data storage is a critically important function for regulatory and competitive reasons, and customers face significant costs if they switch to an alternative vendor.


Information Infrastructure enjoys the benefits of both the inherent operating leverage of the software business with the high switching costs of the hardware business. Because EMC’s Information Infrastructure hardware is built from the assembly of components manufactured by multiple, highly competitive, third-party suppliers, EMC does not suffer the inventory risk, capital intensity, and supplier negotiating power of traditional hardware businesses. EMC’s off-balance sheet assets include a large base of satisfied customers that are receptive to additional offerings from EMC, and a sales force that is considered by many to be the best in the information technology industry. Combined, these assets facilitate EMC’s expansion into adjacent markets.


The rapid adoption of virtualization and cloud computing led by EMC’s 84% owned, publicly traded VMware subsidiary – we are rapidly moving to a world in which you will simply rent your computing power and storage from third parties and you will no longer have that noisy, heat-generating, power-consuming box under your desk – increases the demand for EMC’s offerings, while improving EMC’s opportunity to differentiate its offerings and maintain its pricing.


VMware is driving a transformation of the information technology industry, and in that process we expect it will capture large profits over time. We believe that the VMware can ultimately enjoy a market position and economics similar to that enjoyed by Microsoft’s Windows x86 server and desktop operating system.


We attribute EMC’s substantial stock price appreciation in recent weeks to the market’s recognition of a recently completed strategic acquisition, better-than-expected second quarter operating performance, and the continued business progress of VMware. We believe that EMC is undervalued on a sum-of-the-parts basis, and that the value of its two core operating segments will continue to increase at an attractive rate. .


No. 3: Automatic Data Processing Inc. (ADP, Financial), Weightings: 11.34% - 7,258,302 Shares


Automatic Data Processing Inc. is one of the largest providers of computerized transaction processing data communication and information services in the world. ADP Employer Services offers a comprehensive range of payroll human resources benefits administration time and attendance tax filing and reporting professional employer organization compliance management and retirement plan services to employers in the United States Canada Europe and Latin America. Automatic Data Processing Inc. has a market cap of $19.67 billion; its shares were traded at around $39.18 with a P/E ratio of 16.5 and P/S ratio of 2.2. The dividend yield of Automatic Data Processing Inc. stocks is 3.4%. Automatic Data Processing Inc. had an annual average earning growth of 4.1% over the past 10 years. GuruFocus rated Automatic Data Processing Inc. the business predictability rank of 2-star.


Ackman bought 7.3 million shares during 2Q09 and it is his top purchase.


Here is his latest thoughts on the stock according to the latest quarterly report:
ADP is a high-quality business that trades at a meaningful discount to its intrinsic value due to the near-term effects of the economic downturn. We view ADP as three separate businesses: (1) a payroll processor that has been impacted by rising unemployment and a spike in the corporate default rate, (2) a client fund account that holds money on behalf of its customers (“float”) which has shown declining earnings as low interest rates and recent wage deflation reduce float balances, and (3) a dealer services business that has been impacted by the unprecedented turmoil facing the U.S. automotive industry. As the U.S. economy stabilizes, we believe the headwinds facing ADP will become tailwinds. Given the operating leverage inherent in ADP’s business model, ADP’s earnings should accelerate as it approaches its normalized earnings potential.


ADP’s business has numerous attractive qualities: (1) given the low capital outlays required to run the business, it generates cash flow in excess of reported earnings, (2) its dominant market share and global franchise afford it with meaningful pricing power, (3) it possesses one of the few truly Triple-A balance sheets in the world, (4) the company has additional avenues for growth as it has yet to fully penetrate the global payroll/tax market and has a valuable suite of “beyond payroll” product offerings that it can cross-sell into its existing client base, and (5) it will benefit from higher interest and tax rates (higher taxes lead to greater float balances). We also respect management’s focus on shareholder value. Over the last four years, ADP has spent about $5 billion repurchasing more than 20% of its outstanding shares and paid more than $2 billion in dividends. The combination of a high quality dominant business, shareholder friendly management, and an attractive price in our experience typically leads to a good investment outcome. .


No. 4: McDonald's Corp. (MCD, Financial), Weightings: 6.08% - 2,400,000 Shares


McDonald's Corporation develops operates franchises and services a worldwide system of restaurants that prepare assemble package and sell a limited menu of value-priced foods. The company operates primarily in the quick-service hamburger restaurant business. Mcdonald's Corp. has a market cap of $61.25 billion; its shares were traded at around $56.12 with a P/E ratio of 15.1 and P/S ratio of 2.6. The dividend yield of Mcdonald's Corp. stocks is 3.6%. Mcdonald's Corp. had an annual average earning growth of 7.2% over the past 10 years.


Ackman used to own quite a bit (18.6 million shares) but sold out in 3Q07. In 2Q09, he re-entered a position of 2.4 million shares.


Here is his latest thoughts on the stock according to the latest quarterly report:
We sold our previously held stake in McDonald’s in the fourth quarter of 2007 at approximately $56 per share. Recently, we repurchased a stake in McDonald’s which represents approximately 10% of the funds’ capital at a slightly lower price. Since we sold our initial stake in the company approximately two years ago, McDonald’s has made material financial progress: increasing after-tax earnings (for the prior 12 months) by approximately 16% from $3.6bn to $4.2bn, reducing common shares outstanding by 5% from 1.15bn to 1.09bn, and increasing its dividend by 33%.


From an operating point of view the company has also made significant progress over this period: global same store sales have increased by more than 10%, system-wide sales have grown by more than 10%, and the percentage of franchised restaurants has increased over 200 bps to 80%. McDonald’s makes money in principally two ways: first, by collecting an approximate 14%+ share of its franchisees’ revenues for the use of McDonald’s brand, a business we coined “Brand McDonald’s,” a label McDonald’s has since adopted, and second, by generating operating profits from a portfolio of company-operated stores. .


Click here to read the complete letter. It contains a good discussion on now-bankrupt General Grow Properties, making it fantastic reading.


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