Published by Nicholas McCullum on April 17, 2017
Stock screeners allow investors to filter for nearly any quantitative metric. Dividend yields, price-to-earnings ratios, and payout ratios are easily found using the plethora of financial tools available today.
But how do investors filter for qualitative metrics, like business quality?
A great way to find high-quality businesses is by looking in the portfolios of famous investors with strong track records. One such investor is Bill Ackman, the founder and Chief Executive Officer of the hedge fund Pershing Square Capital Management.
Fortunately for individual investors, large funds like Pershing Square must disclose their holdings in a quarterly filing (called a 13F filing) with the U.S. Securities & Exchange commission. Pershing Square recently filed their 13F for the period ending 12/31/2017.
This article analyzes every holding in Bill Ackman’s stock portfolio in order of the amount Pershing Square owns.
Bill Ackman’s Investment Style
When people think of Bill Ackman, they often think of one of today’s most prominent activist investors. Activist investors take large stakes in underperforming companies with the hope to make changes to management teams and thus improve business performance.
This strategy was seen in Pershing Square’s investment in the Canadian Pacific Railway Company (CP). Ackman first invested in this underperforming Canadian railway in 2011, where he saw an opportunity to improve its operating ratio (which is defined as operating expenses divided by net revenues).
At the time, CP Rail’s operating ratio was hovering around 90%, well above its peer group. This indicated major room for profitability improvements.
Ackman purchased $1.4 billion of stock in CP Rail, which gave his fund an ownership stake of 14.2%. This was enough to get Ackman elected to CP’s board of directors, where he implemented a new CEO – Hunter Harrison, a retired Chief Executive from rival Canadian National Railway (CNI).
Ackman and Harrison believed they could improve the company’s operating ratio from ~90% to ~65% in four years.
The rest, they say, is history. The following diagram displays the performance of CP Rail during the time period after Ackman’s investment.
Source: Financial Post
The CP strategy, which saw Pershing Square triple its original investment in less than five years, is a textbook example of Ackman’s activist investment philosophy.
Bill Ackman is also a very concentrated investor. According to his latest 13F filing, his top four holding compose 76.6% of his portfolio. Here’s how this compares to the top four holding concentrations of other famous investors:
- Joel Greenblatt: 3.9%
- Seth Klarman: 42%
- Warren Buffett: 57%
Ackman’s portfolio exhibits less portfolio diversification among the top four positions than any of the three super-investors mentioned above.
A large reason why Ackman’s portfolio is highly concentrated is because of the nature of his investment strategy. To be an activist investor and make substantial changes to management and corporate governance, you need to own a large proportion of the underlying business. This leads Ackman to make concentrated bets, moreso than many other famous investors.
Moving on, Bill Ackman’s stock portfolio (sorted by market value) will be analyzed in detail.
Table of Contents
You can skip to an analysis of any of Bill Ackman’s stocks with the links below. Stocks are listed in order from lowest ownership to highest ownership. Pershing Square owned only 8 stocks at the time of its last 13F filing.
- Valeant Pharmaceuticals International, Inc. (VRX)
- Nomad Foods Limited (NOMD)
- Platform Specialty Products Corporation (PAH)
- The Howard Hughes Corporation (HHC)
- Air Products & Chemicals, Inc. (APD)
- Mondelez International, Inc. (MDLZ)
- Chipotle Mexican Grill, Inc. (CMG)
- Restaurant Brands International, Inc. (QSR)
Valeant Pharmaceuticals International, Inc. (VRX)
Dividend Yield: 0.0%
Adjusted Price-to-Earnings Ratio: 1.7x
Percent of Bill Ackman’s Portfolio: 0.0% (Ackman has since sold his stake – the regulatory filing indicates 4.5%)
Pershing Square’s latest 13F filing showed the fund owned 18,114,432 shares of Valeant Pharmaceuticals (VRX) with a market value of $263,022,000. This is no longer correct.
Ackman has recently sold his stake in Valeant for a loss of approximately $4 billion – which caused 2015 and 2016 to be Pershing Square’s worst performance years ever. Since Valeant is known to no longer be a Pershing Square holding, it’s business model will not be covered in detail in this analysis. I will touch briefly on the events that led to Valeant’s precipitous stock price decline.
Source: Valeant Investor Relations
The reasons behind the decline in Valeant’s stock price are extremely complicated.
Valeant is a drug company that was once expected to revolutionize the pharmaceutical industry. Former Valeant Chief Executive Officer Michael Pearson grew the company by acquiring smaller drug companies with promising product pipelines and slashing costs wherever possible.
Often, these expense reductions were in the research & development department, which hurt the long-term prospects of Valeant’s subsidiary companies.
To make matters worse, Valeant typically financed these acquisitions with debt. The company was highly leveraged as a result. When the company delayed filing their 10-K in 2016 (more on that later), this broke debt covenants which meant that lenders could recall their bonds prematurely. Accordingly, investors were concerned about a possible default on Valeant’s debt.
Valeant’s business model also came under scrutiny when a Valeant executive was arrested for involvement in a fraudulent kickback scheme with Philidor Rx Services LLC, an entity created with the intention to facilitate money laundering.
The Valeant executive would run a large proportion of its business through Philidor, which was a mail-order pharmacy, helping to squash competition and increase profits for both Valeant and Philidor. The executive at Valeant responsible for the arrangement would ‘kick-back’ a portion of his large bonus to the CEO of Philidor in exchange for participating in the scheme.
When the Philidor scheme was made public, Valeant instigated a large internal review of its accounting procedures. This review ultimately delayed the filing of the company’s 10-K last April, which was why the company nearly defaulted on its outstanding debt.
With all that in mind, it is no surprise that Pershing Square’s Valeant investment was highly unprofitable. Highly leveraged companies that house money laundering schemes and are late making regulatory filings do not typically make attractive investments.
Bill Ackman’s fund originally purchased shares of Valeant in February and March of 2015. Valeant’s lost ~95% of its value between Ackman’s purchase and sale, which was reflected in the performance of his fund:
- 2014: 40.4% profit
- 2015: 20.5% loss
- 2016: 13.5% loss
If Ackman held a more diversified investment portfolio, his fund would not have been affected as badly by the poor performance of Valeant.
Looking ahead, Valeant is trading at a bargain valuation (though it is still not an attractive investment). The company reported adjusted earnings-per-share of $5.47 for fiscal 2016, which means that today’s stock price of $9.48 represents a price-to-earnings ratio of just 1.7x.
Source: Valeant Fourth Quarter Investor Presentation, slide 5
The reason why Valeant’s current valuation multiple is so low is because of the vast amount of uncertainty regarding the company’s future.
Its attractive valuation does not make up for fraud allegations and predatory drug pricing. The price-to-earnings ratio is not an accurate valuation metric when we don’t know if the underlying earnings are real because of instances of fraud.
For income investors, Valeant also does not pay a dividend.
As such, Valeant remains a sell despite its depressed price, and investors who continue to hold the stock are exposing them to high risk and the potential for increased stock price volatility if more fraud schemes are made public.
Pershing Square’s investment in Valeant has been widely publicized. For investors interested in learning more about Ackman’s investment thesis for this company, the following articles might be of interest:
- CNBC: Bill Ackman: ‘We made one very big mistake’ with Valeant and lost big time
- Financial Post: How to Lose $4 Billion: Bill Ackman’s Long Ride Down On Valeant
Nomad Foods Limited (NOMD)
Dividend Yield: 0.0%
Adjusted Price-to-Earnings Ratio: 12.7x
Percent of Bill Ackman’s Portfolio: 5.4%
Pershing Square Capital Management owns 33,333,334 shares of Nomad Foods Limited (NOMD) with a market value of $319 million. This position represented 5.4% of the fund’s invested assets at the time of its last 13F filing.
Nomad Foods is a branded frozen foods producer in Europe. The company is a fairly new publicly-traded security, completing an IPO on the London Stock Exchange in 2014.
On January 12, 2016, Nomad Foods transferred its common stock to the New York Stock Exchange under the current ticker NOMD, where it continues to trade today.
Nomad Foods is a mid-cap stock with a market capitalization of ~$2 billion. The company has operations across 17 countries in Western Europe and enjoys a 13.8% market share in the frozen food market ex-ice cream.
Nomad Foods benefits from market leadership in many of the geographies that it serves. The company is the #1 branded frozen food company in 10 different countries, with its primary brands being Birds Eye, Iglo, and Findus. Consumers recognize a Nomad Foods brand by its distinctive red logo style.
Nomad Foods operates a business model that is split by geography. For example, the Birds Eye brand operate in the U.K., the Findus Brand operates in Italy, Sweden, and France, and the Iglo brand operates in Germany.
The following diagram displays the company’s business breakdown by geography.
The geographic diversity of Nomad Foods does not stop at the consumer level. The company’s manufacturing facilities are also spread across Europe.
In light of recent geopolitical uncertainties (notably Brexit) this manufacturing diversity should protect investors in the event that more countries make choices that effect inter-border trade agreements. Some countries are considering following the U.K.’s decision last summer to leave the European Union.
The following diagram shows the locations and key stats of Nomad’s 10 best-in-class manufacturing facilities.
Looking ahead, Nomad Foods has a well-defined strategic vision to propel the company’s future. It is divided into three buckets.
The first is operational excellence. Nomad aims to eliminate costs and boost margins as a method of increasing earnings-per-share.
The second is to consolidate frozen. Like Hormel Foods (HRL), a U.S.-based company that is similar to Nomad Foods, the company often acquires up-and-coming food brands and then scales them through their cost-effective distribution and advertising network.
Lastly, Nomad Foods is aiming to transition into a more globalized and diversified food company by expanding their reach into the U.S. as well as other subsegments of the food market. This transition will also be primarily done via mergers and acquisitions.
These three strategic priorities can be seen below.
Clearly, the growth of Nomad Foods will largely be driven by acquisitions. The company has identified three different M&A opportunity buckets: European Frozen, European Non-Frozen, and Non-European.
Each of these opportunities is described in detail below.
Acquisitions aside, Nomad will continue to generate healthy organic growth because of its strong brand portfolio.
The company owns iconic brands that have existed for nearly 100 years, and contain exceptional levels of brand awareness and consumer trust.
A key measure of brand awareness is Spontaneous Brand Awareness, which measures the proportion of respondents that can identify a brand without assistance from the interviewer. Nomad’s brands score well on this metric across a number of importance geographies.
Nomad’s brand leadership extends beyond its largest markets. In each of its operating geographies, the company has at least one category where it has the highest market position.
Further, the total number of countries in which Nomad has the highest brand is consistently high (ranging from 7 to 11) across its operating segments.
Nomad Foods reports its financial results in Euros, which presents additional complications for U.S.-based investors.
For fiscal 2016, the company reported adjusted diluted earnings-per-share of EUR0.84, which is worth roughly US$0.89 at prevailing exchange rates. Based on this figure, Nomad’s current stock price of $11.26 represents a price-to-earnings ratio of 12.7x. Nomad is a bargain right now, particularly compared to the current S&P 500 price-to-earnings ratio of ~26.
For dividend investors, though, Nomad is not an appealing investment. The company does not pay a dividend on its common shares (though it does have preferred shares outstanding).
Platform Specialty Products Corporation (PAH)
Dividend Yield: 0.0%
Adjusted Price-to-Earnings Ratio: 20.3x
Percent of Bill Ackman’s Portfolio: 6.7%
Pershing Square Capital Management owns 40,451,506 shares of Platform Specialty Products Corporation (PAH) with a year-end market value of $397 million. This position represents 6.7% of Ackman’s stock portfolio.
Platform was originally incorporated in the British Virgin Islands under the name Platform Acquisition Holdings Limited with the purpose of acquiring businesses in the specialty chemical industry.
The holding company’s first move was an acquisition of MacDermid Inc., a global provider of value-added chemicals. With this acquisition, the company changed their name to Platform Specialty Products Corporation.
Today’s Platform business if highly reflective of that original MacDermind transaction. The company also closed on the acquisition of Arysta LifeScience in February of 2015 for $3.5 billion, which composes the rest of Platform’s current business.
Fiscal 2016 was a decent but not fantastic year for Platform Specialty Products Corporation. Excluding items that affect comparability (like the acquisition of Alent), the company saw adjusted earnings-per-share increase by 5% and adjusted EBITDA increase by 4%.
In 2016, Platform executed on several strategic priorities.
First of all, the company continues to make progress on the integration of various previous acquisitions. This includes run-rate synergies in the company’s Agricultural Solutions (which is the previous Arysta LifeScience businesses) and Performance Solutions segments (which is the previous MacDermid businesses).
The company is also in the midst of transitioning its capital structure to reduce interest expenses. In 2016, the company repriced and extended various loans to generate $26 million annual interest savings and also raised $392 million via equity issuances.
Progress on other strategic priorities for fiscal 2016 can be seen below.
Looking ahead, 2017 is expected to be another year of low to mid single-digit growth for Platform Specialty Products before the impact of acquisitions.
Foreign currency translation will continue to pose a headwind. The company, although small with a market capitalization of $3.6 billion, has very globalized operations. The strong U.S. dollar has impacted the company’s international earnings as they become less valuable when reported in USD.
Financially, Platform Specialty Products is expecting adjusted EBITDA in the range of $800-$830 million for fiscal 2017. Taking the midpoint of this range ($815 million) gives an expected EBITDA growth rate of 6.0% for the year-ahead period. This is in-line with the company’s guidance of mid single-digit growth.
Platform Specialty Products is valued at a discount to the rest of the stock market.
The company reported adjusted earnings-per-share of $0.63 for fiscal 2016. The company’s current stock price is $12.80, which equates to a price-to-earnings ratio of 20.3. This is below the S&P 500’s average price-to-earnings ratio of ~26, but still not a screaming bargain.
With that said, Platform Specialty Products will not appeal to income investors because it does not pay a dividend. You can read more about Bill Ackman’s investment in Platform Specialty Products Corporation at the links below:
- GuruFocus: Bill Ackman Comments on Platform Specialty Products Corporation
- Backed by Bill Ackman, Platform Specialty Products Could Rebound
The Howard Hughes Corporation (HHC)
Dividend Yield: 0.0%
Adjusted Price-to-Earnings Ratio: 25.2x
Percent of Bill Ackman’s Portfolio: 6.9%
Pershing Square Capital Management owns 3,568,017 shares of the Howard Hughes Corporation (HHC) with a market value of $407 million. This company represented 6.9% of the fund’s invested assets at the time of the last regulatory filing.
Longtime followers of Bill Ackman will recall that Ackman made a calculated investment in General Growth Properties (GGP) when it was trading for about $0.25 at the bottom of the financial crisis. Ackman held his stake until 2014 and no longer owns any units of General Growth Properties (which now trades as GGP Inc.).
However, Ackman’s current ownership of the Howard Hughes Corporation is a direct result of his previous stake in General Growth Properties. This real estate development and management company was spun off from General Growth in 2010.
Today, the Howard Hughes Corporation has $6.4 billion of assets, of which $4.7 billion is composed of net real estate. More information about the company’s current corporate structure can be seen in the following diagram.
The company’s operations are dividend into three buckets:
- Operating Assets: Properties owned by the Howard Hughes Corporation that are rented out to create a steady cash flow stream
- Master Planned Communities: The large scale development and sale of subdivisions on residential and commercial land
- Strategic Developments: The development of strategic opportunities to increase NOI
More details about the three different segments of Howard Hughes’ operations can be seen in the following diagram.
The operating assets of the Howard Hughes Corporation are generally on the expensive side of the real estate spectrum. These premier portfolio assets are located across the United States, including Hawaii.
More details about the operating assets of the Howard Hughes Corporation can be seen below.
As I’ve mentioned, the Howard Hughes Corporation was spun off from General Growth Properties in 2010.
Before that event, Howard Huges (the person) had a successful career as a businessman and eventually became a billionaire. His company, the Howard Hughes Corporation, was acquired by the Rouse Company in 1996, which was then acquired by General Growth Properties in 2004.
A more detailed corporate history is shown below.
The company has made tremendous progress since it was spun off.
Initially, the Howard Hughes Corporation was comprised of 34 real estate assets that General Growth viewed as under-appreciated by the markets. The company has since developed more than 3.9 million square feet of office and retail properties, which includes 1,208 multi-family units and 913 hotel rooms.
These development efforts have led to great financial performance. The company has witnessed a 445% increased in recurring net operating income (NOI) since inception.
More details about the progress of the Howard Hughes Corporation since its spinoff in 2010 can be seen in the following slide.
Bill Ackman’s involvement with the Howard Hughes corporation goes beyond his fund’s ~$400 million stake in the company. Ackman is the chairman of the company’s board of directors after being a director of General Growth Properties from June 2009 to March 2010 and leading the company’s restructuring efforts.
The following slide outlines the rest of the company’s management team and board of directors, who collectively have purchased $19 million of equity split between both warrens and common stock.
Looking ahead, the Howard Hughes Corporation will likely continue to realize adequate growth in its underlying businesses.
The company also has a wide degree of operating diversification, which should help protect the company in the event of the next economic downturn. In the company’s Operating Assets segment, the company is well diversified across the different types of real estate such as Retail, Office, Hospitality, and Multi-Family.
As a real estate corporation, the Howard Hughes Corporation uses debt to acquire companies. The idea is that the cash flow generated from new properties will be more than enough to cover payments on the incremental debt assumed in the purchases.
The downside to this strategy is that companies are sometimes forced into default if economic conditions increase vacancy rates and reduce rental income. For the Howard Hughes Corporation, this concern will probably not affect its ability to fulfill its debt obligations because of the company’s conservative financial position.
The company has no significant debt maturities before 2019, with the debt maturity ladder as follows:
- 2017: $67 million of debt maturing
- 2018: $127 million of debt maturing
- 2019: $850 million of debt maturing
- 2020: $122 million of debt maturing
- 2021: $39 million of debt maturing
- Thereafter: $1.554 billion of debt maturing
When corporate debt matures, companies must either reduce their cash balances accordingly or refinance by issuing new debt securities. If cash balances are low and interest rates have increased, this can result in an increase in interest expenses.
The long-term debt maturity ladder of the Howard Hughes Corporation reduces this near-term risk for the company’s shareholders. Other details about the company’s balance sheet can be seen below.
The Howard Hughes Corporation recently reported financial results for fiscal 2016, which included adjusted earnings-per-share of $4.73. Today’s stock price of $119.33 represents 25.2x price-to-earnings ratio (using adjusted earnings).
Unlike most companies covered on this website, the Howard Hughes Corporation does not pay a dividend. For real estate investors looking to generate current portfolio income, better opportunities exist elsewhere.
More information on Bill Ackman’s investment in the Howard Hughes Corporation (and previously, General Growth Properties) can be found in the following articles:
- Bloomberg: Ackman’s General Growth Sale Marks End of Investment Era
- Fool: How Howard Hughes and Bill Ackman Made A Good Team Through General Growth Properties
- Investopedia: Bill Ackman’s 2 Best Investments
Air Products and Chemicals, Inc. (APD)
Dividend Yield: 2.8%
Adjusted Price-to-Earnings Ratio: 17.8
Percent of Bill Ackman’s Portfolio: 9.4%
Pershing Square Capital Management’s last 13F filing reported an ownership of 3,870,760 shares of Air Products & Chemicals, Inc. (APD) with a market value of $557 million. This company is Ackman’s fourth largest holding and is his largest holding with less than a $1 billion market value.
Air Products & Chemicals is an industrial firm that specializes in providing atmospheric and process-related gas products. The company’s customers are generally industrial, materials, and energy companies.
The company is very shareholder-friendly and recognizes that the most important job of a Chief Executive Officer is capital allocation. The company also makes efforts to minimize bureaucracy, which reduces efficiency and impairs investment returns.
Source: Air Products & Chemicals First Quarter Investor Presentation, slide 5
Over the long-run, Air Products & Chemicals has certainly succeeded in their goal of creating shareholder value.
The company has increased its annual dividend payments for 34 years in a row. This qualifies the company to be a Dividend Aristocrat – a group of companies with 25+ years of consecutive dividend increases.
In recent quarters, Air Products & Chemicals has made tremendous progress in improving their profitability metrics. The company’s EBITDA margin since the second quarter of 2014 can be seen below.
Source: Air Products & Chemicals First Quarter Investor Presentation, slide 8
Looking ahead, Air Products & Chemicals has a ‘5 Point Plan’ that management is focusing on to improve the returns of their business. This 5 Point Plan can be seen below.
Source: Air Products & Chemicals First Quarter Investor Presentation, slide 6
Air Products & Chemicals benefits from a robust balance sheet. The company has plenty of cash available for internal investment in the near future.
At the end of calendar 2016, Air Products & Chemicals had $4.3 billion of total debt and $4.4 billion of cash and cash equivalents. Management estimates that ~$3 billion is available for investment right now. The company’s balance sheet is outlined in more detail in the following table.
Source: Air Products & Chemicals First Quarter Investor Presentation, slide 12
Air Products & Chemical reported adjusted earnings-per-share of $7.55 for fiscal 2016, which was an increase of 14% over the previous year. Today’s stock price of $134.30 represents a 17.8x multiple of 2016’s earnings (using adjusted earnings). The company is attractively valued compared to the rest of the market.
The most recent quarterly dividend declared by Air Product & Chemicals was in the amount of $0.95 per share, or $3.80 annually. Today’s stock price of $134.30 is priced at a forward dividend yield of 2.8%.
For context, the currency S&P 500 dividend yield is ~2.0%, which means that investors generate 40% more income from an investment in Air Products & Chemicals than they do from the large-cap stock market on average.
For more information regarding Bill Ackman’s investment in Air Products & Chemicals, the following articles may be useful:
- Activist Investor Bill Ackman Finds Gold In Air Products & Chemicals
- Bill Ackman Comments On Air Products & Chemicals
- Bill Ackman Actually Just Got Some Good News About One of His Investments
Mondelez International, Inc. (MDLZ)
Dividend Yield: 1.7%
Adjusted Price-to-Earnings Ratio: 22.7
Percent of Bill Ackman’s Portfolio: 17.2%
At the time of its last regulatory filing, Pershing Square Capital Management owns 22,942,225 shares of Mondelez International (MDLZ) with a market value of $1.0 billion. The position represented 17.2% of the fund’s invested assets and is Ackman’s third largest individual stock holding.
Mondelez is a global foods corporation that specializes in snacks. The company’s chocolates, cookies, coffee, and powdered beverages are enjoyed by consumers around the world – nearly 75% of sales come from outside of North America. Mondelez spun off Kraft Foods Group – now part of Kraft Heinz (KHC) – in 2012.
Mondelez has many brands that are household names, including Oreo, Cadbury, Chips Ahoy! and Trident. The brand recognition of these products gives the company a strong competitive advantage over its peer group.
Mondelez’ future growth prospects appear very strong. The company’s revenue growth will be driven by its ‘power brands’, which composed 70% of the company’s net revenue and are growing at about twice the rate of the overall company.
Source: Mondelez International 2017 CAGNY Presentation, slide 12
Mondelez also benefits from an extremely diverse product offering. The company has 7 brands with $1 billion in annual sales and another 44 brands with $100 million in annual sales.
For context, compare this to two of the largest branded food and beverage companies: Coca-Cola (KO) has 21 brands with $1 billion in annual sales and Pepsi (PEP) has 22 brands with $1 billion in annual sales. However, the market capitalizations of these two companies are significantly higher than Mondelez’:
- Coca-Cola: $185 billion market capitalization
- Pepsi: $161 billion market capitalization
- Mondelez: $67 billion market capitalization
Mondelez also ensures that consumers are aware of their products by earmarking a large proportion of its capital for marketing initiatives. The company has spent an average of $1.5 billion per year on marketing over the past three years. Mondelez’ marketing is highly targeted as the company aims to increase the utility of its advertising dollars.
Source: Mondelez International 2017 CAGNY Presentation, slide 16
Many investors might be concerned about the effect of eCommerce on the investment prospects of Mondelez. Consumer behavior is changing, and the traditional wholesale-retail distribution model may no longer be effective.
Fortunately, Mondelez has a strong digital footing that will be a large driver of growth moving forward. The company has invested heavily in its eCommerce snacking platform, which saw net revenues grow by more than 35% in fiscal 2016.
Source: Mondelez International 2017 CAGNY Presentation, slide 29
Mondelez recently reported its fiscal 2016 financial results, which saw constant-currency adjusted earnings-per-share increase by 24% on the back of higher operating margins, lower taxes, and share repurchases.
The company continues to make improves in its efficiency. Its adjusted operating margin increased by 2.3% year-over-year.
Source: Mondelez International 2017 CAGNY Presentation, slide 32
Looking ahead, 2017 is expected to be another strong year for Mondelez.
The company is again expecting double-digit constant currency adjusted earnings-per-share growth, with 1% driven by organic net revenue growth. The rest of the earnings-per-share expansion will be caused by improved margins and continued share repurchases.
Source: Mondelez International 2017 CAGNY Presentation, slide 36
The company also expects its free cash flow to continue to grow, driven by improved earnings, capez reduction, restructuring reductions, and an improvement in working capital leverage.
Mondelez generated $1.6 billion in free cash flow in fiscal 2016, which is expected to grow to ~$2.8 billion by year-end 2018.
Source: Mondelez International 2017 CAGNY Presentation, slide 38
Mondelez generates a large amount of cash flow, and allocates this capital in a very shareholder-friendly manner. Over the past four years, the company has raised its cumulative return of capital each and every year.
Mondelez returned a total of $14.8 billion to shareholders in 2016, composed of $10.8 billion of share repurchases and $4.0 billion of dividend payments.
Source: Mondelez International 2017 CAGNY Presentation, slide 43
Mondelez is a very attractive investment right now. The current quarterly dividend payment of $0.19 is good for a forward dividend yield of 1.7%, and the company is currently trading at a 22.7x price-to-earnings ratio (using adjusted earnings).
The company’s dividend is also safe, as Mondelez paid out only 39% of 2016’s adjusted earnings-per-share of $1.94. The company has plenty of room to continue growing dividend payments even if earnings growth slows.
Accordingly, Mondelez International is a buy.
Chipotle Mexican Grill, Inc. (CMG)
Dividend Yield: 0.0%
Price-to-Earnings Ratio: ~600x
Percent of Bill Ackman’s Portfolio: 18.4%
Pershing Square Capital Management owns 2,882,463 shares of Chipotle Mexican Grill, Inc. (CMG) with a market value of $1.1 billion. It is the fund’s second-largest position and represents 18.4% of its invested assets.
Ackman’s investment in Chipotle is quite new and was based on an expected turnaround in the company after food safety concerns were widely-publicized in 2015. Chipotle’s stock continued to lag in 2016, which presented an opportunity for Pershing Square to initiate its ownership stake.
Ackman described his Chipotle investment as follows in Pershing Square’s 2016 portfolio update:
“On September 6, 2016, we announced a 9.9% stake in Chipotle Mexican Grill which we purchased at an average price of $405 per share. Chipotle has built a superb brand pioneering the “fast casual” restaurant industry with the success of its outstanding product offering, unique culture, and powerful economic model. We have followed the business for years, noting how it has disrupted the fast food industry with its high quality, delicious and customizable hot meals that are prepared quickly and sold at affordable prices. The company has been significantly negatively impacted by food safety issues beginning in the fourth quarter of 2015 which caused a peak decline in average unit sales of 36%. In response, the company has implemented enhanced food safety protocols over the past year, and worked to win back lost customers. While traffic and sales have begun to recover, average unit volumes were still 19% below peak levels as of the fourth quarter of 2016.
We have always believed that a good time to buy a great business is when it is in temporary trouble. While Chipotle’s reputation has been bruised, we think that with the passage of time and improved operations, marketing, technology, and governance initiatives, the business will not only recover but become much stronger.”
Ackman’s investment came at an opportune time. Chipotle’s current stock price of $463.62 represents a 14.5% increase over his cost basis of $405.
The food safety issues that Ackman describes in the passage above were very serious. The company had to close locations because of reported cases of E. coli, salmonella, and norovirus at different regions across the United States. There were also animal rights violations at one of Chipotle’s suppliers, which caused the company to remove carnitas (deliverd from that particular supplier) from its menu for months.
Fortunately for Ackman and his investors, the turnaround seems to be making decent progress. Management’s most important priority of eliminating health concerns linked to its food has been completed, and consumers are beginning to restore trust in the Chipotle brand. On the company’s fourth-quarter earnings conference call, management said:
“For the fourth quarter of 2016, we generated revenue of $1.03 billion, an increase of 3.7% on comparable restaurant sales decline of 4.8%, and the opening of 72 new restaurants. This produced diluted earnings of $0.55 per share for the quarter. Our comparable restaurant sales improved to a positive 14.7% in December, as we lapped the softer comparison from December 2015.“
“I feel good about the comp trend. I feel like we’re at least holding our own and perhaps starting to see an inflection point. But most importantly, we are doing this with very little promo. So we’ve weaned ourselves off of promo. Most of the improvement from December into January was we’re going up against a softer comp, but I feel really good about that.“
Chipotle’s management believes they are starting to see an inflection point, and although a softer 2015 number helped December’s comparable restaurant sales, the worst has passed for Chipotle’s food safety scandal.
Chipotle’s food safety concerns have abated, but the company still does not look like an attractive investment at today’s level based on fundamental metrics. Chipotle’s current stock price of $463.62 represents a ~600x multiple of 2016’s earnings-per-share of $0.77.
The reason why this ratio is so high is because of the company’s earnings decline in 2016 caused by the food safety scandal. For context, Chipotle’s earnings-per-share were $15.10 in fiscal 2015. If the company maintained that earnings power, its current valuation would be a much more reasonable valuation of 30.7x. This is in line with other high-growth food stocks like Starbucks (SBUX).
Looking ahead, Chipotle is expected to open approximately 200 new stores in fiscal 2017 and comparable restaurant sales to increase in the high-single-digits. However, Chipotle’s valuation will still be expensive even if this growth is realized, and investors can find much more reasonable restaurant valuations elsewhere. Chipotle also does not pay a dividend, so investors are not paid to wait for price appreciation.
You can read more Chipotle analysis on Sure Dividend below.
Alternatively, the following articles tell the story of Bill Ackman’s investment in Chipotle in more detail.
- Seeking Alpha: Chipotle: Why I Disagree With Ackman
- Investopedia: Bill Ackman Is Selling Off Chipotle
- Bloomberg: Bill Ackman’s Chipotle Case Is Weak
Restaurant Brands International Inc. (QSR)
Dividend Yield: 1.3%
Adjusted Price-to-Earnings Ratio: 35.5
Percent of Bill Ackman’s Portfolio: 31.6%
Pershing Square Capital Management owns 39,150,551 shares of Restaurant Brands International Inc. (QSR) with a market value of $1.9 billion. This stock represents a substantial portion of Ackman’s portfolio – 31.6%, or nearly one-third, at the time of the last 13F filing.
RBI is a franchised restaurant business that operates two main brands:
The company’s scale is impressive. With more than 20,000 restaurants worldwide generating $24+ billion of annual sales, million of consumers enjoy meals from this company each week.
Source: Restaurant Brands International Fourth Quarter Earnings Presentation, slide 3
However, the company is committed to raising its dividend payments on a regular basis. The company has raised its dividend every quarter since 3Q14 and has a current payout ratio of only 46%, meaning there is still room to continue growing shareholder distributions even if earnings are temporarily flat.
Source: Restaurant Brands International Fourth Quarter Earnings Presentation, slide 23
One of the largest recent developments for RBI shareholders is the recent acquisition of Popeye’s Louisiana Chicken (PLKI).
The transaction, which was originally announced on February 21, adds a new iconic brand to RBI’s family along with more than 2,600 restaurants. It also adds a new dimension to the company. While Burger King sells hamburgers and Tim Horton’s sells coffee & baked goods, Popeye’s sells chicken. This new product category prevents cannibalization among RBI’s existing brands.
Source: Popeye’s Acquisition Investor Presentation, slide 5
While Popeye’s is an established brand, there is still plenty of room for it to grow after it the acquisition by RBI.
The company’s franchises have annual restaurant sales in excess of $1.4 million and strong EBITDA margins, which makes them an attractive investment for Popeyes’ franchisees. Because of this, it should be easy for Popeyes to expand by opening new restaurants.
Popeyes also has a limited international presence, which presents upside in emerging markets after the acquisition by RBI.
Source: Popeye’s Acquisition Investor Presentation, slide 9
RBI offered $79.00 per share of Popeyes, which was equivalent to an enterprise value of $1.8 billion. The transaction was funded through a mix of cash and financing from J.P. Morgan (JPM) and Wells Fargo (WFC).
After the transaction, Popeyes is expected to operate independently as a wholly-owned subsidiary of Restaurant Brands International.
More details about the transaction can be seen below.
Source: Popeye’s Acquisition Investor Presentation, slide 7
Post-merger, RBI will have a much-improved footprint in the United States. Popeyes has roughly half as many domestic locations as its closest competitor Kentucky Fried Chicken (YUM), and is well-poised to improve its market share with the financial backing of RBI.
Source: Popeye’s Acquisition Investor Presentation, slide 15
Internationally, the difference in store count between Popeyes and KFC is more striking.
Popeyes had only 621 international restaurants at the time of the last regulatory filing, which was dwarfed by KFC’s figure of 16,437. However, Burger King had more than 8,500 international locations, which indicates that RBI has expertise in the international markets. This bodes well for the international growth of the pro-forma Popeyes brand.
Source: Popeye’s Acquisition Investor Presentation, slide 16
The transaction was completed on March 27, officially welcoming Popeyes to the RBI family.
Aside from the Popeye merger, RBI’s 2016 year was very successful.
The company reported adjusted diluted earnings-per-share of $1.58, which was an eye-popping 45.0% increase from the previous year’s figure. The company’s current stock price of $56.09 represents a 35.5x multiple of 2016’s earnings (using adjusted earnings). QSR does not present a compelling value right now, and other food stocks are trading at a better bargain.
Fundamentally, RBI’s earnings growth was driven by strong underlying business performance. The company reported positive same-store sales growth in each of its restaurant brands, and increased its overall restaurant count by 4.8%.
Source: Restaurant Brands International Fourth Quarter Earnings Presentation, slide 4
Looking ahead, RBI will continue to benefit from its reasonable capital structure.
The company’s net debt to EBITDA ratio is standing at 3.9x, and its cash balance of $1.5 billion partially offsets its total debt of $8.9 billion. The company’s debt securities hold a B+ and B- credit rating from Standard & Poor’s – just shy of investment grade.
Source: Restaurant Brands International Fourth Quarter Earnings Presentation, slide 22
While RBI’s stock price is certainly priced for growth right now, Ackman has done well with the stock. He previously has a huge stake in Burger King International before it was merged with Tim Horton’s to create Restaurant Brands International in 2014. Since the merger, RBI has returned nearly 60%.
The following articles provide more detail on Bill Ackman’s investment in Restaurant Brands International.
- GuruFocus: Bill Ackman Comments on Restaurant Brands International
- Forbes: The Rebirth of Burger King Has Made 3G Capital, Bill Ackman, and Warren Buffett Over $14 Billion
The portfolios of successful investors are great places to find high-quality stocks suitable for investment.
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