The Ira Sohn conference invites a number of well-known investment managers to give public presentations of their favorite investing ideas. This year, billionaire Bill Ackman of Pershing Square- except for a brief reference to his last public presentation, when he recommended shorting Herbalife Ltd. (NYSE:HLF) – focused on the long case for The Procter & Gamble Company (NYSE:PG). We think that this was a highly questionable pick. Ackman’s interest in The Procter & Gamble Company (NYSE:PG) is well known; in fact, about a year ago he reported to investors that Pershing Square had sold out of Citigroup Inc (NYSE:C) in order to buy shares of the personal products company. The fund bought nearly 22 million shares of The Procter & Gamble Company (NYSE:PG) during the second quarter of 2012, according to SEC filings (research more of Ackman’s long positions over time), for a position of $1.3 billion. Pershing Square has since added some shares. At the time, we estimated that the fund had lost nearly $400 million on its Citigroup investment (read our coverage of Ackman’s trade).
The average price of The Procter & Gamble Company (NYSE:PG) during Q2 2012 looks to have been about $64. At a current price of $78, then, Ackman has indeed generated profits with a 22% gain. However, these results have essentially matched those of the S&P 500 and so his decision to go long The Procter & Gamble Company (NYSE:PG) is not necessarily that admirable. In addition, Citigroup (along with many other large banks) have been on a tear in the last year with that stock in particular up over 50%. Pershing Square didn’t just lose money on Citi while the fund owned it- Ackman and his team sold out of the stock near the bottom in exchange for a consumer staples stock which has only performed in line with the market.
If we assume that Pershing Square sold Citigroup at about $30 per share- which looks to be about its Q2 midpoint- then the fund has missed out on a 64% return or $19 per share x 26 million shares = about $500 million. It has earned, by our reckoning, $14 per share x 22 million shares = about $310 million shares in The Procter & Gamble Company (NYSE:PG), but that still leaves Pershing Square about $200 million short- which would represent $40 million in carried interest- even with the fund investing more capital in Procter & Gamble than it did in Citigroup. In other words, Ackman is already “in the red” in his decision to dump Citigroup and buy P&G.
Ackman’s argument for Procter & Gamble as not only a market-beating stock, but as his best idea, also seems unpersuasive. The manager has already criticized the company’s management for underperformance and efficiency, but aside from a suggestion that the CEO vacate some of the many Boards of Directors he is a member of Ackman’s own ideas for improvement were limited. In addition, we’d imagine that the opportunities for activist pressure are limited at a company with a market cap of over $200 billion.
Procter & Gamble currently trades at 18 times earnings, whether we consider its trailing results or analyst expectations for the fiscal year ending in June 2014. Net income was up 6% in its most recent quarter compared to the same period in the previous year, but this was primarily due to higher net margins as revenue grew by only 2%. We don’t expect the company to be able to continually increase its margins, so over time earnings growth should match revenue growth and going by last quarter’s numbers it’s not clear that earnings will rise enough to make the stock a value at these levels. It’s possible that P&G is a better value than peer Johnson & Johnson (NYSE:JNJ), which carries a trailing earnings multiple of 23, but it’s difficult to see it as a good value in absolute terms let alone one of the best opportunities in the market.
Ackman has made some excellent picks at investing conferences in the past (including his long recommendation for General Growth Properties Inc (NYSE:GGP) four years ago) but his move into Procter & Gamble has not done well in the last year compared to the market or to the stock it replaced in Pershing Square’s portfolio. The company also doesn’t look too attractive right now, and so we would advise against following the fund into P&G.
Disclosure: I own no shares of any stocks mentioned in this article.