Analyzing Pershing Square's positions in 3Q 2013

Part 6

Why did Ackman unload Canadian Pacific Railway stake in October?

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Pershing Square Capital Management is a New York–based activist hedge fund founded and run by Bill Ackman. Ackman started the firm in 2004 with $54 million from his personal funds and from his former business partner, Leucadia National. News reports in October claimed that the fund has seen its assets under management decline by $1.2 billion from $12.4 billion in March, mainly due to setbacks in investments made in J.C. Penney Co. (JCP) and a large bet against Herbalife Ltd. (HLF).

In this six part series, we’ll go through some of the main positions Pershing Square Capital Management LP traded this past quarter.

The fund bought no new positions in 3Q 2013. It added to its positions in Air Products & Chemicals (APD), and reduced its positions in General Growth Properties, (GGP) Canadian Pacific Railway (CP), and Procter & Gamble (PG). It sold its positions in J.C. Penney (JCP).

Abbreviated financial summaries and metrics for these securities are included below. Detailed analysis and recommendations require a subscription (more information at the bottom of the article).

Why sell Canadian Pacific Railway Ltd. (CP)?

As of September 30, Canadian Pacific Railway accounted for 27.7% of Pershing’s U.S long portfolio, down 4% from June 30. In June 2013, Pershing Square Capital announced that it plans to sell up to 7 million common shares of Canadian Pacific Railway Ltd. It said that Canadian Pacific’s share price has more than tripled since it first invested in the company. As a result, its stake in CP has grown to approximately 26% of the combined assets of its funds. Given this increased concentration, portfolio management considerations have driven Pershing Square’s decision to trim its holdings. In October, it announced it had sold 6 million shares for around $800 million in an open market transaction. It said that following the transaction, it will own 9.8% stake in the company and remain the company’s largest shareholder. News reports stated that Ackman cashed in on the turnaround at CP after he won a proxy fight to replace former CEO Fred Green with Hunter Harrison.

In 3Q 2013, the company reported robust results, with a 45% increase in adjusted EPS to $1.88 that grew over third-quarter 2012. Reported net income in the third quarter was $324 million. Total revenue increased 6%, to $1.5 billion. Operating income was up 39%, and operating ratio came in at 65.9—an improvement of 820 basis points. The company said on its earnings call that its balance sheet is getting stronger, with debt and leverage ratios improving quickly. From a liquidity perspective, it’s well positioned, with no significant debt maturities in the near term, with low cash tax payments and stable pension contributions given its previous pension prepayments.

The company recently announced a dividend of 0.3329 per share. Canadian Pacific Railway Limited, through its subsidiaries, operates as a transcontinental railway providing freight transportation services, logistics solutions, and supply chain expertise in Canada and the United States. The company transports bulk commodities (including grain, coal, sulphur, and fertilizers) and merchandise freight (such as finished vehicles and automotive parts). It also transports forest products (such as wood pulp, paper, paperboard, newsprint, lumber, panel, and oriented strand board) and industrial and consumer products (comprising chemicals, energy, and plastics, as well as mine, metals, and aggregates). The company provides rail and intermodal transportation services over a network of approximately 14,400 miles serving the principal business centers of Canada—from Montreal, Quebec, to Vancouver, British Columbia—and the Midwest and Northeast regions of the United States. Canadian Pacific Railway Limited was incorporated in 2001 and is headquartered in Calgary, Alberta.

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Pershing Square Capital uses fundamental analysis with a value orientation employing extensive research and thorough due diligence in its decision-making process. It uses a unique mix of value investing and an activist approach in sifting through and identifying investments.

Founder Bill Ackman has a Bachelor of Arts degree magna cum laude from Harvard College in 1988 and an MBA from Harvard Business School in 1992.

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