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Sydnee Gatewood
Sydnee Gatewood
Articles (642) 

Bill Ackman Buys United Technologies, Axes Nike

Activist investor throws support behind Loeb in breaking up United Technologies

Pershing Square leader Bill Ackman (Trades, Portfolio) disclosed that he established one position and exited another when he released his first-quarter portfolio this week.

The activist investor, who has had bad luck with a number of investments over the past several years, established a position in United Technologies Corp. (NYSE:UTX) and divested his Nike Inc. (NYSE:NKE) stake in the first quarter.

United Technologies

The guru invested in 1.9 million shares of the Farmington, Connecticut-based company for an average price of $131.23 per share, giving the position 5.06% portfolio space. He holds roughly 0.2% of the company.

The industrial conglomerate, which is part of the aerospace and defense industry, has a market cap of $99.61 billion; its shares were trading around $124.50 on Wednesday with a price-earnings ratio of 22.27, a price-book ratio of 3.26 and a price-sales ratio of 1.62.

The Peter Lynch chart below suggests the stock is overpriced as it is trading higher than its fair value.

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United Technologies’ financial strength was rated 5 out of 10 by GuruFocus. While the company has been issuing new debt for the past several years, it is still at a manageable level. Its Altman Z-Score of 2.67, however, indicates the company is under some financial pressure.

Its profitability and growth scored an 8 of 10 rating as its operating margin outperforms 83% of competitors. In addition, it has a moderately high Piotroski F-Score of 6 and a business predictability rating of four out of five stars.

While GuruFocus notes the company has had consistent earnings and revenue per share growth over the past several years, it three-year revenue and earnings per share growth rates are underperforming their historical averages.

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According to Bloomberg, Ackman threw his support behind splitting the company, which manufactures jet engines, elevators and air conditioners, into three separate businesses. The idea was proposed by fellow shareholder Daniel Loeb (Trades, Portfolio), who heads Third Point Management.

Loeb presented his case for a breakup in his fourth-quarter 2017 letter to shareholders:

“As standalones, each of these businesses will benefit in the long run from a bespoke corporate strategy, more flexibility in allocating capital, better alignment of management incentives, a dedicated board of directors with relevant industry experience, and greater strategic optionality.”

He also argued that even though United Technologies has strong assets with leading market share in each of its core businesses, its shares have lagged its peers, as measured by the SPDR Select Sector Fund- Industrial (XLI), by approximately 45% over the last five years.

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“UTC fits a pattern of many underperforming conglomerates where value is diminished by the ill effects of a ‘one size fits all’ approach to corporate strategy, incentive compensation, and capital allocation. At UTC, this has led to a well-documented history of poor management execution – exemplified most recently by the botched ramp-up of the next-generation geared turbofan (‘GTF’) engine – as well as market share losses and underinvestment in key business areas.”

As for Ackman, he said on a conference call that United Technologies “is one of the last remaining conglomerates,” which, other than Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B), “have not had a great track record.”

Nike

After establishing a significant position in Nike in fourth-quarter 2017, Ackman quickly turned around and sold the 5.8 million-share stake for an average price of $65.99 per share. The trade had an impact of -6.22% on the portfolio.

According to GuruFocus, Ackman made an estimated gain of 15% on the investment.

The Beaverton, Oregon-based manufacturer of athletic footwear and apparel has a market cap of $114.21 billion; its shares were trading around $70.86 on Wednesday with a price-earnings ratio of 66.86, a price-book ratio of 11.68 and a price-sales ratio of 3.33.

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

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GuruFocus rated Nike’s financial strength 7 out of 10. While the company has been issuing new long-term debt over the past several years, it is still at a manageable level. In addition, Nike’s Altman Z-Score of 8.04 indicates it is financially strong.

Boosted by an expanding operating margin, the company’s profitability and growth was rated 8 out of 10. In addition, Nike has a moderate Piotroski F-Score of 5 and a 4.5-star business predictability rating.

With 0.53% of outstanding shares, Frank Sands (Trades, Portfolio) is the company’s largest guru shareholder. Other major guru shareholders are Pioneer Investments (Trades, Portfolio), Manning & Napier Advisors Inc., the MS Global Franchise Fund (Trades, Portfolio), Tom Gayner (Trades, Portfolio) and Lee Ainslie (Trades, Portfolio).

Other trades

During the quarter, Ackman also trimmed his positions in The Howard Hughes Corp. (NYSE:HHC), Mondelez International Inc. (NASDAQ:MDLZ), Restaurant Brands International Inc. (NYSE:QSR) and Automatic Data Processing Inc. (NASDAQ:ADP).

The $3.8 billion portfolio, which is composed of seven stocks, is largely invested in the consumer cyclical sector. The fund posted a negative return of 8.2% for the first quarter of the year. It posted an annual loss of 4% in 2017, 13.5% in 2016 and 20.5% in 2015.

Disclosure: No positions.

About the author:

Sydnee Gatewood
I am an editorial assistant 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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