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Sydnee Gatewood
Sydnee Gatewood
Articles (2488) 

Bill Ackman’s Pershing Square Takes a Bigger Bite of Restaurant Brands

Activist guru expands stake in restaurant company that appears to be thriving despite coronavirus woes

June 03, 2020 | About:

Pershing Square Capital Managements Bill Ackman (Trades, Portfolio) revealed earlier this week he boosted his firms stake in Restaurant Brands International Inc. (NYSE:QSR) by 56.21%.

The gurus New York-based hedge fund is known for taking large positions in a handful of underperforming companies and pushing for change in order to unlock value for shareholders. While he has found success recently with Chipotle Mexican Grill Inc. (NYSE:CMG) and Starbucks Corp. (NASDAQ:SBUX), one of Ackmans most well-known activist targets, which did not end well for him, was Valeant Pharmaceuticals. He also pursued an unsuccessful short of Herbalife Nutrition Ltd. (NYSE:HLF), which he bowed out of in 2018.

According to Real-Time Picks, a Premium GuruFocus feature, Ackman invested in 9.04 million shares of Restaurant Brands on June 1, impacting the equity portfolio by 7.13%. The stock traded for an average price of $55.82 on the day of the transaction.

He now holds a total of 25.12 million shares of the Canadian restaurant holding company, which represent 19.81% of the portfolio. GuruFocus estimates Pershing has gained 43.61% on the investment since establishing it in the fourth quarter of 2014.

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The company, which owns fast-food restaurant brands like Tim Hortons, Burger King and Popeyes Louisiana Kitchen, has a $17.36 billion market cap; its shares were trading around $58.61 on Wednesday with a price-earnings ratio of 25.29, a price-book ratio of 12.07 and a price-sales ratio of 4.95.

The Peter Lynch chart shows the stock is trading above its fair value, suggesting it is overpriced.

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In his annual letter to shareholders, Ackman wrote that due to its drive-thru, pickup and delivery options, which accounted for around two-thirds of its sales, Restaurant Brands was well positioned to provide low-cost food during the Covid-19 lockdowns.

Fast-food chains appear to be recovering from the coronavirus-driven decline more quickly than the rest of the restaurant industry as well. CNBC reported last week that Restaurant Brands announced same-store sales at its U.S. Popeyes locations soared more than 40% as of the third week of May. This was a significant increase from its performance in the second half of March, when sales were flat compared to a year ago. The company said it also saw sales rebound at Burger King and Tim Hortons, though same-store sales in their respective home markets remained negative.

GuruFocus rated Restaurant Brands financial strength 3 out of 10. As a result of issuing approximately $4.3 billion in new long-term debt over the past three years, it has low interest coverage. The Altman Z-Score of 1.16 also warns the company could be at risk of going bankrupt since there has been a slowdown in revenue per share growth over the past 12 months.

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The companys profitability fared better, scoring a 7 out of 10 rating. Although the operating margin is in decline, it still outperforms a majority of its competitors. Restaurant Brands also has strong returns and a moderate Piotroski F-Score of 5, which indicates business conditions are stable.

With an 8.37% stake, Ackman is by far the companys largest guru shareholder. Other gurus with large positions in Restaurant Brands as of March 31 were Warren Buffett (Trades, Portfolio), Lee Ainslie (Trades, Portfolio), PRIMECAP Management (Trades, Portfolio), Jim Simons (Trades, Portfolio) Renaissance Technologies, Louis Moore Bacon (Trades, Portfolio), Pioneer Investments (Trades, Portfolio), Ray Dalio (Trades, Portfolio)s Bridgewater Associates, Joel Greenblatt (Trades, Portfolio), Prem Watsa (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio).

Portfolio composition and performance

Over 60% of Ackmans $6.57 billion equity portfolio, which is composed of 10 stocks as of the end of the first quarter, is invested in the consumer cyclical sector, with all other industries having much smaller representations.

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After several years of underperformance, Pershing Square made a comeback in 2019 with a return of 58.1%. This was substantially above the S&P 500 Indexs 31.49% return.

Disclosure: No positions.

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About the author:

Sydnee Gatewood
I am the editorial director at GuruFocus. I have a BA in journalism and a MA in mass communications from Texas Tech University. I have lived in Texas most of my life, but also have roots in New Mexico and Colorado. Follow me on Twitter! @gurusydneerg

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