Bill Ackman Recently Bought These Two Companies, Should You?

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Bill Ackman, the founder and managing director of Pershing Square Capital Management, is a famous activist investor with many past successful investments. With nearly $8.9 billion in total assets under management, he runs a quite concentrated portfolio. In the third quarter this year, he initiated two new buys, bringing the total number of stocks in his portfolio to 10. His two new buys were Burger King Worldwide (NYSE: BKW) and Matson (NYSE: MATX). Burger King made up as much as 6% of his total portfolio and Matson accounted for around 0.85%. Should we consider those two stocks as good buys after he bought it?

Long Live the King

Burger King Worldwide is the indirect parent of Burger King Corporation, which owns and franchises the Burger King hamburger restaurant brand. With around 12,534 restaurants, Burger King has its presence in around 82 countries. Around 43% of restaurants were located overseas, accounting for more than 39% of its total revenue. Compared to other quick service restaurants, Burger King has the largest percentage of franchised restaurants, nearly 90%. Whereas with 34,010 total restaurants globally, McDonald’s (NYSE: MCD) franchised restaurants were nearly 27,500, or approximately 80.9%. YUM! Brands (NYSE: YUM) had the largest number of restaurants globally, more than 36,000 with 27,751 restaurants, or 77% of the total, being franchised.

However, Burger King relies much of its operations on debt financing. As of September, it booked $1.12 billion in stockholders’ equity and $483 million in cash. What worries me is the high level of goodwill and intangibles ($3.43 billion) along with the significant long-term debt ($2.9 billion). As a result, Burger King had negative tangible book value of -$6.60 per share.

Bill Ackman bought 38.36 million shares of Burger King Worldwide at prices ranging from $13 - $15.85 per share. As of September this year, his stake in Burger King Worldwide was worth nearly $535 million, accounting for 6% of his total portfolio. Currently, it is trading at $17.02 per share, with a total market capitalization of $5.96 billion. It seems pricey with a nearly 24x forward P/E and nearly 14x EV/EBITDA. McDonald’s and YUM are much cheaper. McDonald’s is valued at 15x forward earnings and 10x EV/EBITDA and YUM is valued at 17.9x forward P/E and 11.22x EV/EBITDA.

"Go West, Young Man..."

Matson is a Hawaiian ocean transportation company in the Pacific with its legacy dated back as far as in 1882. In the third quarter 2012, it earned $8.7 million, or $0.21 per share on revenue of $401.4 million. The revenue grew nearly 5.5% year-over-year compared to $380.6 million in revenue in the third quarter 2011. Matt Cox, its CEO, said:

“Matson reported another steady quarter, with results mixed by trade lane. We saw continued rate and volume strength in our expedited service from China, continued strong Guam volume and modest volume improvement in our Hawaii trade. These gains, while encouraging, were largely offset by increased expenses primarily associated with vessel and barge dry-docking during the quarter." 

The company employs a good chunk of debt. As of September, it had $272 million in stockholders’ equity, $12 million in cash and $307 million in long-term debt.

Bill Ackman bought nearly 3.65 million shares of Matson. Currently, the value of his holding is worth nearly $85 million, accounting for more than 0.86% of his total portfolio. Maybe the reason for this buy is to speculate on the increasing shipping & logistics demand in the Pacific. At the end of November, the company announced to raise Hawaii service by $175 per westbound container and $85 per eastbound container, effective the first day of 2013. Furthermore, the terminal handling charge would increase by $50 per westbound container and $25 per eastbound container. Currently, Matson is trading at $23.27 per share, and it is valued in the market at 16.62x forward earnings and only 6.34x EV/EBITDA.

Foolish Bottom Line

Even with the large stake in Burger King Worldwide, I would not initiate any position in this company due to the current high valuation and high level of goodwill and intangible assets. For Matson, with reasonable EV/EBITDA valuation, higher service charges for its shipping and logistics service in the beginning of 2013, the company could be a good play for investors in the next year.

 


hoangquocanh has no positions in the stocks mentioned above. The Motley Fool owns shares of McDonald's. Motley Fool newsletter services recommend Burger King Worldwide and McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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