Bill Ackman’s Investor Pres (Jan 2018): Fannie & Freddie; Herbalife Short; Nike, ADP, Mondelez; Chipotle; QSR; HHC; PAH

Smart Money

Pershing Square London Investor Meeting, January 29, 2018

  • 6% net returns since inception (1/1/04) vs. 220.8% S&P 500

Core Investment Principles

  • Simple, predictable, FCF-generative business
  • Formidable barriers to entry
  • Limited exposure to extrinsic factors that we cannot control
  • Generally, low financial leverage levels
  • Minimal capital markets dependency
  • Typically, highly liquid, mid- and large-cap companies
  • Fair price “as is,” but a substantial discount to optimized value
  • Base case valuation not reliant on future M&A or platform value
  • In-place or identified management with high degree of integrity, track record of success, and appropriate incentives
  • Typically, no controlling shareholder
  • Occasional mispriced probabilistic investments:
    • Must offer highly asymmetric return to compensate for possibility of permanent loss of capital
    • Limited to investments within our circle of competence
    • Will represent a small % of fund capital in the aggregate and an appropriate “return on invested brain damage”
  • Occasional short investments:
    • High conviction short with a “ceiling on valuation”
    • Identifiable catalyst for closing the gap between market price and intrinsic value that generally does not require our public activist involvement
    • Preferably structured with asymmetric risk/reward

Automatic Data Processing (ADP)

  • High quality, simple, predictable, FCF generative business
  • ADP participates in an attractive industry with robust secular growth
  • Recent developments have confirmed elements of our investment thesis
    • Tax reform will drive a 13-15% increase in earnings
    • Rising interest rates will increase ADP’s profits on its $24Bn float balance over time
  • Significant opportunity to create long-term shareholder value
    • Management committed to improved growth and accelerated margin performance
    • Achieving ADP’s structural potential will drive substantial shareholder value
      • Employer Services’ growth can increase from 2-4% to 7%+ while operating margins should increase from 19% today to 35% or greater
      • Implies $10 of EPS by FY 2022, >50% increase relative to the status quo
    • Remains undervalued and does not reflect the significant opportunity for improvement
      • Pro forma for tax reform, trades at 24x ADP’s FY June 2019 EPS guidance, slightly below the valuation when we initiated the position

Fannie Mae (FNMA) and Freddie Mac (FMCC)

  • Any proposal for housing finance reform must satisfy the following conditions in order to succeed
    • Simplicity to ensure broad support and minimize systemic risk
    • Appealing investment proposition to raise new private capital, including visibility into long-term earnings power
    • Fair treatment of current investors in Fannie and Freddie in order for new capital to be raised
  • While momentum for reform is stronger now than at any time since the conservatorship began, several key points of debate remain
    • Feasibility and desirability of creating new competitors
    • Appropriate capital levels, rates of return, and degree of regulation
    • Treatment of various classes of securities in Fannie and Freddie
  • If housing finance reform is successful, we believe Fannie and Freddie will be worth multiples of their current share prices

Nike (NKE)

  • One of the world’s most iconic brands and the market leader in the athletic footwear and apparel industry
  • Dominant market position creates formidable barriers to entry
    • Unmatched marketing spend and brand loyalty
    • Patented innovations and manufacturing skill (primarily footwear)
    • Substantial leverage with suppliers and retailer customers
  • Athletic footwear accounts for 67% of revenue and is an attractive industry structure with favorable competitive dynamics
  • Historical high-single-digit annual revenue growth rate likely to continue
    • Positive secular trends of health & wellness and casualization
    • Emerging markets comprise 30% of revenue and are growing rapidly
    • Pricing power due to strong product innovation and marketing
  • Margin opportunity due to new manufacturing processes and rapid growth in distribution channels with most favorable economics

Herbalife Short (HLF)

  • Financial performance has deteriorated significantly in recent years
    • Despite the company having repurchased 33% of outstanding shares since we shorted the stock, EPS has declined by 19% since 2013
  • FTC settlement, which took effect on 5/25/17, appears to have severely impacted the company’s US business (20% of revenue)
    • US sales for the 2nd and 3rd quarters were down 18% y-o-y
    • US volume points continue to sequentially decline
  • China business (20% of revenue) was previously a major growth engine for the company and appears to have flat-lined
  • Currently trades at a high valuation in light of low business quality, challenging operational trends, and long-term regulatory risk

Mondelez (MDLZ)

  • Trades at 18x our estimate of 2018 EPS
    • Slight discount to S&P 500 despite high business quality, secular growth potential, and substantial margin improvement opportunity
    • 15% discount to both peer valuations and historical average multiple
    • Undervaluation driven by concerns around the US grocery landscape, MDLZ’s growth potential, and recent CEO transition
  • Expect continued acceleration in revenue growth and clarity on the new CEO’s strategy will cause MDLZ’s gap to intrinsic value to close
    • Only 25% of sales in the US, with 40% in emerging markets and 85% in snacks
    • Improved quality of organic growth with higher contribution from volume growth
    • EM’s macro, FX, and product rationalization have turned from headwinds to tailwinds
    • No need for new CEO rebase earnings given strength of manufacturing base and supply chain; healthy levels of A&P investment; and remaining margin opportunity
  • Compelling upside from re-rating combined with double-digit EPS growth

Chipotle Mexican Grill (CMG)

  • On November 29, CMG announced a search for a new CEO and the transition of founder Steve Ells to Executive Chairman
  • Board of Directors is committed to recruiting a world-class CEO
  • Incredible opportunity for new CEO given CMG’s vast unrealized growth potential
    • Digital experience
    • Menu innovation
    • Delivery and catering
    • Domestic and international expansion

Restaurant Brands International (QSR)

  • Continued strong business performance
    • Net unit growth of 6% at Burger King and 4% at Tim Hortons
    • Margin enhancement from continued efficiencies and Popeyes integration
    • Same-store-sales growth at Burger King more than offset flat results at Tim Hortons
  • Cheap relative to intrinsic value and peers
    • Trades at 21x our estimate of 2018 FCF per share
    • Peers trade at an average of 25x 2018 FCF per share based on analyst estimates
    • Free option on future value-creating acquisitions

Howard Hughes Corporation (HHC)

  • Strong condo sales at HHC’s 60-acre Ward Village coastal development in Hawaii with 93% of its existing condo inventory sold or under contract
  • Seaport District on track for grand opening in Summer 2018
  • HHC’s Summerlin master planned community (MPC) in Las Vegas will have its 5th straight year with over $100M in land sales
  • Increase in land sales at both Bridgeland and Woodlands MPCs in Houston
  • Announced that BoA will serve as the lead anchor tenant for a new 51-story, Class A downtown office building in Chicago
  • 37M SF of remaining vertical development entitlements at its existing MPCs alone, which is nearly 10x the amount of development that HHC has executed since 2011

Platform Specialty Products Corporation (PAH)

  • 9% organic EBITDA growth due to revenue growth and cost savings
  • Refinance $4Bn of debt, significantly lowering interest expense
  • Valuation remains at a discount to publicly traded segment peers
    • Trades at 9.5x analyst estimates of 2018 EBITDA
    • Cabot Micro trades at 13x and FMC trades at 12x 2018 EBITDA
  • Announced separation to address SOTP discount
  • Based on analyst estimates for 2018 EBITDA, PAH shares would be valued at more than $19, nearly 75% above current levels, if it traded at current peer multiples

Investment Team Bios

  • William Ackman (CEO/PM): Gotham Partners, Co-Founder and PM; Harvard College; Harvard Business School
  • David Klafter: Gotham Partners, General Counsel; White & Case/Paskus Gordon & Mandel, Litigator; Hon. Charles Tenney, Law Clerk; Northwestern; NYU Law School
  • Ryan Israel: Goldman Sachs, Analyst; Wharton School
  • Brian Welch: Blackstone Group, PE Analyst; Wharton School
  • Ben Hakim: Blackstone Group, Senior Managing Director; PWC, Associate; Cornell University
  • Anthony Massaro: Apollo, PE Associate; Goldman Sachs, Analyst; Wharton School
  • Charles Korn: KKR, PE Associate; Goldman Sachs, Analyst; University of Western Ontario
  • Bharath Alamanda: KKR, PE Associate; Goldman Sachs, Analyst; Princeton University
  • Feroz Qayyum: Hellman & Friedman, PE Associate; Evercore, Analyst; University of Western Ontario

Image Source: Bloomberg