Bill Ackman’s Letter to Investors, Part II: Pershing’s Top Portfolio Detractors

Platform Specialty Products Corp (NYSE:PAH)‘s stock lost over 30% in the first quarter and is currently down by 28% year-to-date. In this way, Pershing’s holding in Platform Specialty Products Corp (NYSE:PAH) detracted the fund’s returns by 1.4% in the first quarter.

“Although several of the company’s end markets have softened recently, Platform’s underlying results continue to outpace its competitors. Platform’s organic EBITDA was up slightly, as the benefit of cost synergies more than offset the increase in corporate costs. In Ag Solutions, organic EBITDA increased 3%, as higher cost synergies more than offset the increase in corporate expenses. In Performance Solutions, organic EBITDA declined 2%, as cost synergies were more than offset by the increase in corporate expenses. Reported EBITDA declined 6% due to the negative headwinds from FX. As a result, EPS declined nearly 30% due to the negative impact from financial leverage,” the letter added.

At the end of December, Zoetis Inc (NYSE:ZTS) represented Pershing’s second-largest holding with a value of over $2.0 billion. However, last week, the fund reported the sale of 16.85 million shares of Zoetis, following which it owns 24.97 million shares, equal to 5% of the outstanding shares. The stock inched down by over 7% in the first three months, but gained some ground in April and is currently 3% in the red year-to-date. At the end of the first quarter, Zoetis Inc (NYSE:ZTS) had a negative contribution of 1.4% to Pershing’s returns. In the letter, Ackman said that the stake was sold for portfolio management reasons, but he continues to be pleased with Zoetis’ management’s performance and has high expectations for the company.

“During the first quarter, adjusted revenue grew 6%. The Companion Animal segment was the star of the quarter, with growth of 20% driven by new product launches. Livestock revenue growth was nominal at 1% due to competition in U.S. swine products and mild U.S. weather. Gross margins and SG&A spending were both better than expectations. Management continues to execute well on the cost efficiency program announced in May 2015. SG&A fell by 6% YoY, despite six extra days in the quarter. Operating margins expanded ~500 bps from the prior year. Management now believes savings from the efficiency program will exceed the original $300 million targeted when the program was announced last May. All savings from this program are expected to be realized by 2017,” Ackman mentioned.

Finally, Howard Hughes Corp (NYSE:HHC) detracted Pershing’s portfolio by 0.6% in the first quarter. The stock has lost more than 7% since the beginning of 2016 and Ackman thinks it is trading at a discount to the value of its assets and that the management’s effort to increase transparency will allow investors to better assess the company. Ackman also highlighted Howard Hughes’ sale of 80 South Street for $380 million, which the company can use for other projects. At the end of 2015, Pershing held 3.57 million shares of Howard Hughes Corp (NYSE:HHC).

“In its first quarter earnings release, HHC increased its projected annual stabilized NOI estimate (excluding the South Street Seaport) to $215 million from $203 million at year-end. Land sales in its Master Planned Communities (“MPC”) segment increased 32% driven by a $40 million bulk residential sale to a homebuilder in Summerlin, NV and two commercial sales to medical entities. Overall, Summerlin demand remains strong while the Houston MPCs (Woodlands and Bridgeland) exhibited some weakness due to the decline in oil prices. In March 2016, HHC opened the Westin at The Woodlands, a 302-unit hotel which it owns and manages,” Ackman said.

Disclosure: none