Billionaire Bill Ackman’s Letter to Investors: Comments on New Stake in Chipotle, Restaurant Brands International, Mondelez & More

Pershing Square Capital Management is a New York-based activist hedge fund run by billionaire activist Bill Ackman. He founded the firm in 2004 and has routinely beaten the S&P 500 index by a big margin. Pershing Square Capital has been known to take large equity stakes in companies and then improve their operations by working with the management. According to the fund’s third-quarter letter to shareholders, it performed more or less in line with the broader market showing a net return of 2.9% as compared to the 2.8% return given by Dow Jones. However, year-to-date, Pershing Square declined by 13.5% net of fees, versus the 12.6% gain registered by Dow Jones.

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The letter also showed that Valeant Pharmaceuticals Intl Inc (NYSE:VRX) was the biggest contributor to Pershing’s performance during the third quarter adding 1.5% to the gross performance of the fund. Unlike other large hedge funds, Bill Ackman takes large concentrated bets and his fund had just nine long US positions at the end of the third quarter, reflecting his strong conviction in these stocks. This makes Pershing Square Capital Management’s stock holdings extremely important from an investor’s perspective. Having said that, let’s take a closer look at some companies that Pershing discussed in its latest letter to investors.

Pershing Square Capital Management acquired a 9.9% stake in Chipotle Mexican Grill, Inc. (NYSE:CMG) during the third quarter at an average price of $405 per share. In its latest 13F filing, the fund disclosed holding 554,213 shares of Chipotle Mexican Grill worth $234.71 million. Bill Ackman’s fund believes that a good time to buy a great business is when it is facing temporary issues. Chipotle Mexican Grill, Inc. (NYSE:CMG) saw a 36% decline in unit sales due to food safety issues beginning in the fourth quarter of 2015 leading to a fall in stock price. However, the fund considers that this is a temporary issue and the business will not only recover, but become much stronger with the passage of time. Moreover, the investor is positive on Chipotle Mexican Grill, Inc.(NYSE:CMG) because of a number of factors:

“i) A strong and relevant brand built by visionary leadership

ii) A differentiated product offering with a highly attractive value proposition

iii) Substantial scale in the fast casual industry and first-mover advantage in real estate

iv) Strong unit economics and extremely high returns on capital, driven by a well-honed model that facilitates best-in-class throughput

v) Enormous growth opportunities including new units and operating enhancements such as mobile ordering and catering.”

The company’s stock is trading at around 10% below Pershing Square’s average buy price and has seen a decline of 15% over the last three months.

Restaurant Brands International Inc. (NYSE:QSR) represents Pershing’s largest position, with the fund owning 39.15 million shares valued at $1.75 billion as of the end of September. In the letter, the investor pointed out that Restaurant Brands International Inc. (NYSE:QSR) reported strong quarterly results by executing on its three key growth drivers: same store sales, net unit growth, and operational efficiency. In the third quarter, the company generated 2% same store sales growth in its Burger King and Tim Hortons concepts. The company continued to improve the efficiency of Tim Hortons’ cost structure by reducing overhead costs by more than 8% during the quarter and meaningfully increasing margins in the franchised and distribution businesses. The stock has returned an impressive 25% year-to-date.

Mondelez International Inc (NASDAQ:MDLZ) is Pershing Square Capital Management’s second-largest position with a total value of $1 billion and containing 22.94 million shares. This $65 billion company has an impressive portfolio of globally recognized snack brands such as Oreo biscuits, Cadbury, Cadbury Dairy Milk and Milka chocolates and Trident gum. Bill Ackman’s fund considers that Mondelez International Inc. (NASDAQ:MDLZ) is one of the few large cap packaged food companies that is demonstrating any underlying volume growth, however modest. While the global growth rate of the company’s snacking categories has moderated over the course of the year primarily due to macroeconomic headwinds, he believes that the long-term outlook for these categories remains robust, especially in the emerging markets where Mondelez International Inc. (NASDAQ:MDLZ) has large market shares and robust routes to market. Year-to-date, the company continues to show progress with its significant cost savings opportunity and productivity initiatives, and remains on track to reach its 2018 margin target of 17% to 18% with further upside beyond 2018.

During the third quarter, Pershing Square Capital Management exited its investments in Canadian Pacific Railway Limited (USA) (NYSE:CP) and Zoetis Inc. (NYSE:ZTS) which were two of its highly successful activist engagements. Bill Ackman sold 9.8 million shares of Canadian Pacific Railway Limited (USA) (NYSE:CP) on August 4, approximately five years after the position had been initiated. During this time period, Canadian Pacific Railway Limited’s (USA) (NYSE:CP) share price increased nearly fourfold and its operating performance went from worst to nearly tied for first with Canadian National Railway (USA) (NYSE:CNI). Its credit rating improved from a weak Baa-/BBB- to a strong Baa+/BBB+ as the company’s financial improved substantially.

Pershing Square also exited its position in Zoetis Inc. (NYSE:ZTS) completely on November 9, two years after he announced an 8.5% stake. Ackman played an activist role in pushing the company to dramatically improve operations. Zoetis Inc. (NYSE:ZTS) developed and implemented a number of value-enhancing initiatives including restructuring its supply chain, pursuing organic revenue growth opportunities while reducing costs, and setting a goal of increasing operating margins from ~25% in 2014 to ~34% by 2017. Pershing Square Capital Management purchased it stake in Zoetis Inc. (NYSE:ZTS) at an average cost of approximately $37 per share. During this period, the stock generated a handsome return of 58% for Pershing Square Capital Management.

Disclosure: None