Activist investor Bill Ackman (Trades, Portfolio)’s Pershing Square Capital Management recently released its 13F filing for the third quarter of 2022, which ended on Sept. 30.
Founded by Ackman in 2004, Pershing Square focuses on taking large stakes in a small number of well-researched companies that it deems to be fundamentally strong but underperforming in the short term. After obtaining a large enough position of influence as a major shareholder, preferably enough to get board representation, the hedge fund then aims to catalyze improvements in the target company’s strategy in order to further increase its expected profitability.
According to its latest 13F report, the firm sold out of its entire stake in Domino's Pizza Inc. (DPZ, Financial) during the quarter. Meanwhile, its top buy was an addition to its Canadian Pacific Railway Ltd. (CP, Financial) investment.
Investors should be aware 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
Domino's Pizza
Ackman’s firm sold out of its entire 2,061,312-share stake in Domino's Pizza (DPZ, Financial), which used to take up 10.76% of the equity portfolio. During the quarter, shares traded for an average price of $379.59.
Ackman previously announced the sale of his stake in the major American pizza chain in a letter to shareholders on Aug. 19, writing:
“In light of the company’s relatively high valuation in the context of a volatile market environment, we decided to exit our investment to raise cash for alternative investment opportunities.
We have enormous respect for Domino’s and its management team led by Russell Weiner, and we expect the company to continue its long track record of success.”
While it seems Ackman still has a good opinion of the company, he noted the stock was trading at 28 times Pershing Square’s estimates of the next 12 months’ earnings, which may have been acceptable in the bull market but has become precarious in the current bear market. The price-earnings ratio as of this writing is even higher at 29, though this is still lower than 2021 levels.
The company has achieved strong growth in recent years with a three-year revenue per share growth rate of 13.4% and a three-year earnings per share without non-recurring items growth rate of 17.5%, but some investors are concerned that both its real growth and growth in its price multiples were boosted by the Covid-19 pandemic, which drove more people to order takeout and delivery food.
Canadian Pacific Railway
Pershing Square’s top buy for the quarter was an addition of 12,292,785 shares to its Canadian Pacific Railway (CP, Financial) holding, bringing the total position to 15,237,044 shares. At the quarter’s average share price of $75.51, this boosted the equity portfolio by 10.42%.
Ackman describes Canadian Pacific as “a high-quality, inflation-protected business led by a best-in-class management team that operates in an oligopolistic industry with significant barriers to entry.”
Railroads are a time-tested inflation protection bet because they are natural monopolies over their areas of operation. Regardless of the economic situation, people still need to move goods across country, and trucks just will not cut it if you need to move massive quantities of products such as grain, lumber or coal without breaking the bank.
Canadian Pacific’s pending acquisition of fellow railroad Kansas City Southern is also expected to prove transformational as it will form the only railroad connecting end-to-end from Canada to Mexico. However, even though the sale closed in a voting trust last December, it has yet to go through on an operational front, pending a federal hearing that is expected to delay the merger until at least early 2023.
The company has a three-year revenue per share growth rate of 4.7% and a three-year earnings per share without non-recurring items growth rate of 15.4%, showing progress in becoming more profitable. Even with solid profitability improvements, though, Canadian Pacific’s valuation seems to be waiting on the Kansas City Southern merger, as its price-earnings ratio of 31 is higher than industry peers such as Union Pacific (UNP, Financial), Canadian National (CNI, Financial) and CSX (CSX, Financial).
See also
In addition to the above trades, Pershing Square made minor additions to Lowe’s Companies Inc. (LOW, Financial), Restaurant Brands International Inc. (QSR, Financial) and Hilton Worldwide Holdings Inc. (HLT, Financial) in the third quarter.
As of the quarter’s end, Pershing Square’s equity portfolio consisted of six stocks valued at a total of $7.88 billion. The turnover for the period was 11%.
The top holdings were Lowe’s with 24.74% of the equity portfolio, Chipotle Mexican Grill Inc. (CMG, Financial) with 21.08% and Restaurant Brands with 16.33%.
By sector, the firm had more than three quarters of its portfolio invested in consumer cyclical stocks, with some allocations to industrials and real estate.
