Bill Ackman Goes All Aboard On Canadian Pacific Railway

Summary

• The activist investor’s previous investment in the company resulted in a management overhaul.
• Canadian Pacific recently acquired Kansas City Southern.

Billionaire investor Bill Ackman (Trades, Portfolio) revealed a stake in Canadian Pacific Railway Ltd. (CP, Financial) earlier this week, returning to one of his most successful bets after selling out in the third quarter of 2016.

The guru’s New York-based hedge fund is known for taking large positions in a handful of underperforming companies and pushing for change in order to unlock value for shareholders. While he has found success with Chipotle Mexican Grill Inc. (CMG, Financial) and Starbucks Corp. (SBUX, Financial) in recent years, one of Ackman’s most well-known activist targets, which did not end well for him, was Valeant Pharmaceuticals. He also pursued an unsuccessful short of Herbalife Nutrition Ltd. (HLF, Financial), which he bowed out of in 2018.

According to an amendment to Pershing Square’s fourth-quarter 2021 13F filing with the Securities and Exchange Commission, Ackman invested in 2.8 million shares of Canadian Pacific, allocating 1.88% of the equity portfolio to the stake. The stock traded for an average price of $73.15 per share during the quarter.

The activist guru’s previous investment in the company, which was established in 2011, resulted in an overhaul of the board and appointment of a new CEO in 2012. He sold the stake four years later in 2016, pocketing about $2.6 billion in profits for his firm, according to Forbes.

The Canadian railroad operator completed its acquisition of Kansas City Southern in December, creating the first rail network that spans Canada, the U.S. and Mexico.

The company has a $71.35 billion market cap; its shares were trading around $76.53 on Tuesday with a price-earnings ratio of 23.39, a price-book ratio of 2.7 and a price-sales ratio of 8.39.

The GF Value Line suggests the stock is modestly overvalued currently based on historical ratios, past financial performance and future earnings projections.

On Jan. 27, the company reported its fourth-quarter and full-year 2021 results. For the quarter, it posted adjusted earnings of 95 cents per share on $2.04 billion in revenue.

For the year, it recorded adjusted earnings of $3.76 per share on $8 billion in sales.

GuruFocus rated Canadian Pacific’s financial strength 4 out of 10. Although the company has issued new long-term debt over the past three years, it is at a manageable level due to adequate interest coverage. The Altman Z-Score of 2.12, however, indicates the company is under some pressure since assets are building up at a faster rate than revenue is growing. The return on invested capital eclipses the weighted average cost of capital, so value creation is occurring as the company grows.

The railroad company’s profitability fared better, scoring a perfect 10 out of 10 rating on the back of operating margin expansion as well as strong returns on equity, assets and capital that top a majority of competitors. Canadian Pacific is also supported by a moderate Piotroski F-Score of 4 out of 9, meaning conditions are typical for a stable company. Despite a slowdown in revenue per share growth over the past 12 months, it has a predictability rank of 4.5 out of five stars. GuruFocus says companies with this rank return an average of 10.6% annually over a 10-year period.

Ackman is now the company’s largest guru shareholder with 0.30% of its outstanding shares. Other top guru investors include Bill Gates (Trades, Portfolio)’ foundation trust, Ken Fisher (Trades, Portfolio), Ray Dalio (Trades, Portfolio), Jim Simons (Trades, Portfolio)’ Renaissance Technologies, Paul Tudor Jones (Trades, Portfolio), Prem Watsa (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), First Eagle Investment (Trades, Portfolio) and Lee Ainslie (Trades, Portfolio).

Portfolio composition and performance

The majority of Ackman’s $10.78 billion equity portfolio, which was composed of seven stocks as of the end of the fourth quarter, is invested in the consumer cyclical sector. The real estate and industrials spaces have much smaller representations.

The guru’s other holdings as of Dec. 31 were Lowe’s Companies Inc. (LOW, Financial), Hilton Worldwide Holdings Inc. (HLT, Financial), Chipotle, Restaurant Brands International Inc. (QSR, Financial), The Howard Hughes Corp. (HHC, Financial) and Domino’s Pizza Inc. (DPZ, Financial).

Pershing Square recorded a net performance of 26.9% for 2021, slightly underperforming the S&P 500’s total return of 28.7%.

Disclosures

I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities.

The views of this author are solely their own opinion and are not endorsed or guaranteed by GuruFocus.com.