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

Last week, billionaire activist investor Bill Ackman‘s Pershing Square released a letter to shareholders, in which the investor outlined the fund’s performance and provided his take on the outlook of some of the companies that Pershing Square has bet on. In the first part (read here), we mentioned Pershing’s returns, which have been lagging lately and took a look at Ackman’s short position in Herbalife, as well two of its largest holdings: Valeant Pharmaceuticals and Air Products and Chemicals. Let’s take a look at several other companies that Ackman discussed in his letter.

Let’s start with Mondelez International Inc (NASDAQ:MDLZ), which represented Pershing’s second-largest detractors, having negatively affected Pershing’s return by 3.5% in the first three months of 2016. With a $1.94 billion position that contained 43.37 million shares, Mondelez represented Pershing’s third-largest stake at the end of 2015. However, in March, Pershing unloaded 20.0 million shares of the company for portfolio management reasons and currently owns 5.7% of the company. Mondelez International Inc (NASDAQ:MDLZ)’s stock has plunged by over 10% during the first quarter, but has rebounded in April and is currently 1% in the red year-to-date. Ackman considers that Mondelez’ 2018 target margins of 17% to 18% will considerably increase the company’s value.

“This target reflects some of the steps the company has taken over the last several years to improve its supply chain, reduce portfolio complexity, and rationalize overhead while increasing advertising and promotion. While we believe that the business is capable of higher margins, if Mondelez were to only achieve management’s target, the business would be worth significantly more than its current public market valuation.”

Nomad Foods (NYSE:NOMD) is another food company that Ackman mentioned in the letter, highlighting the acquisitions of Iglo and Findus, which transformed Nomad into the largest branded frozen food company. The stock has lost over 31% year-to-date, but the investor considers that the company will continue the consolidation of the packaged food segment over the long-run and will focus on the integration of its latest acquisitions and on achieving synergy targets in the near-term. In the first quarter, Nomad Foods (NYSE:NOMD) had a negative contribution to Pershing’s returns of 0.7%.

“Recent performance has shown weak top-line trends, with like-for-like sales down 5% for 2015, the result of Iglo’s historic strategy which was to disproportionately invest behind new frozen food categories, at the expense of core offerings, in the hope of driving incremental growth. Recently, Nomad has shifted its focus back to its core offerings. This shift will take some time to impact the Company’s financial performance, but ultimately we believe it will result in renewed growth,” Ackman said.

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