Billionaire hedge fund manager Bill Ackman has made a few missteps, but he remains one of the most watched hedge fund managers in business. Investors follow his 13F regulatory reports with interest to see what the activist and value investor id buying or selling in any given quarter.
During the third quarter and thereafter, Ackman bought and sold shares of Mondelez International (NASDAQ:MDLZ), Automatic Data Processing (NASDAQ:ADP), Restaurant Brands International (NYSE:QSR), and Nomad Foods (NYSE:NOMD).
Reworking his Oreo bet
Mondelez has been an important part of Pershing Square's portfolio since it was added to the portfolio in 2015. Ackman added to the position in the third quarter by buying call options and total return swaps, which magnify the gain or loss on the stock.
As you examine the changes in Pershing Square's ownership, note the increase in its total exposure due to stock options and swap positions that were added near the end of the third quarter:
|Date||Common Stock||Stock From Call Options/Swaps||Total Exposure|
|June 30, 2017||14.5 million shares||N/A||14.5 million shares|
|Sept. 27, 2017||13.9 million shares||70.1 million shares||84.1 million shares|
|Oct. 6, 2017||13.6 million shares||69.7 million shares||83.4 million shares|
In all, Pershing Square effectively owns 5.53% of Mondelez, when all forms of exposure to the company's share price are taken into consideration.
Mondelez is one of the world's largest snack-food producers. The company has performed well by reducing costs and expenses, driving a 1.3 percentage-point increase in adjusted operating income margin in the most recent quarter. Chocolates remain its best-performing category, as organic net revenue grew 5.2% year over year, with 65% of its brands gaining market share in the category. (Mondelez's chocolate business is massive, the result of its 2010 acquisition of Cadbury.)
Ackman seems to like what he sees, given that he's taken a stake for Pershing Square primarily in the form of call options and swaps, which leverage the gain or loss on the underlying stock. It's notable he's adding more exposure to the stock after he trimmed the position at slightly higher prices earlier this year.
Adding to an activist position
Automatic Data Processing is an activist play for Pershing Square, which argues that the company could be more efficient and generate higher margins. Ackman's thesis for ADP is that the company could earn as much as $8.70 per share in 2022, up from $3.70 in 2017, with the vast majority of the increase ($3.15) coming from higher margins.
ADP shareholders don't seem too interested in what Ackman has to say about the company. Neither he nor his two candidates for election to ADP's board received more than 25% of the votes at the recent shareholder meeting, according to an ADP 8-K filing.
In an interview with CNBC, Ackman said he had no plans to materially change his position in ADP stock and characterized his proxy loss as a win, since management has implied it would focus on many of the issues he brought up. He noted that ADP's high returns make activism more difficult:
One of the things that hurt us in this contest is the stock has done well. I don't think anyone's ever run a proxy contest with a stock as up as much as ADP before. And I think we've shown with the amount of minority support we got here that shareholders will support an activist in a case even where the stock has done well if there is a significant chance of improvement.
Later, he noted that proxy contests are just one tool in the tool belt for an activist investor.
Activism isn't about winning proxy contests. It's about making money for investors by getting companies that aren't achieving their potential to achieve their potential.
Proxy contests are one of the tools in the activist tool kit to motivate a company. We used that tool here. We were forced to. It wasn't our first choice. But we were forced to.
Maybe Ackman won. Maybe he lost. I'll let you decide. But either way, Pershing Square's economic ownership in the company is 13% larger now than it was at the end of the second quarter in terms of shares owned or otherwise controlled.
Cashing in on a winning restaurant stock
Pershing Square's stake in Restaurant Brands was reduced again this quarter, as Pershing Square sold approximately 32% of the shares his firm owned at the end of the second quarter. The majority of the reduction came from a previously reported block sale on July 2, when Pershing Square sold 10 million shares. Pershing Square dumped another 2.65 million shares some time thereafter.
The owner of Burger King, Tim Hortons, and Popeyes Louisiana Kitchen has been a rare winner in the restaurant industry. Excluding the impact of currency fluctuations, Burger King, the largest of its brands by sales volume, saw same-store sales grow 3.6% in the third quarter. Tim Hortons' same-store sales grew at a tepid pace of 0.3% year over year, while Popeyes' sales declined 1.8% on a comparable sales basis.
The results are far better than those from Chipotle Mexican Grill, another large holding for Pershing Square. Chipotle is struggling to bring back the customers it lost to an outbreak of food-borne illnesses in 2015. Across the industry, restaurants saw same-store sales decline by 2.2% in the third quarter. In contrast, Restaurant Brands International is performing well, and Ackman seems happy to cash in his winnings.
Flipping frozen fish
Pershing Square sold the entirety of its stake in Nomad Foods, a company that primarily produces frozen fish products. Pershing Square first invested in the company in 2016, after it acquired Iglo and the European business from Findus Group.
Ackman laid out the case for Nomad in a May 2017 letter to shareholders of his publicly traded fund, Pershing Square Holdings. In it, he wrote that the company traded for a modest valuation relative to adjusted free cash flow.
At its current price of $12.14 per share, the stock trades at approximately 10 times the company's [free cash flow] guidance of 200 million [euros] before restructuring and other one-time items. Moreover, Nomad remains highly cash-generative, having built a significant cash balance of 330 million [euros] of cash, or approximately $2 per share. We believe that Nomad continues to trade at a modest valuation, despite substantial business progress.
Ackman blamed previous management of the companies Nomad acquired for weak performance following the 2015 acquisition, suggesting that the current management team was turning around Nomad's performance by investing more into its core products. But Ackman isn't sticking around to see Nomad's sales growth turn positive. However, as he sold out through a secondary offering in which Nomad repurchased a block of his shares. Those shares were sold at $14.30 each, before underwriting fees.
Down but not out
After years of market-crushing returns, Pershing Square has suffered through major losses in Valeant Pharmaceuticals, a misstep at Chipotle Mexican Grill, and a losing proxy contest at Automatic Data Processing. Pershing Square is also struggling with a short on Herbalife, which was recently restructured to take the form of put options, and capped at 3% of Pershing Square's capital base.
Through October, Pershing Square Holdings, the publicly traded vehicle, lost approximately 3.3%, compared with a gain of nearly 17% for large-cap stocks.