What Has Billionaire Bill Ackman’s Top Investment Been Up To?

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What Has Billionaire Bill Ackman’s Top Investment Been Up To?

Billionaire Bill Ackman and Pershing Square Capital have been getting a lot of attention of late, but not for its number one investment, Canadian Pacific (NYSE: CP). All the attention has been about his short position in Herbalife, but Ackman owns 24 million shares of Canadian Pacific, which makes up 23.3% of Ackman’s portfolio and 13.8% of Canadian Pacific’s outstanding shares (see all the stocks Ackman owns).

Ackman started building a position in Canadian Pacific during the third quarter of 2011 with claims that management has mishandled the company, causing it to become one of the least efficient rail operators in North America. Other big-time Canadian rail companies include Canadian National Railway (NYSE: CNI) and Genesee & Wyoming Inc. (NYSE: GWR). Genesee appears to be struggling of late, reporting total carloads in December 2012 down 9.1% year over year. The real drag on the company was a decrease in coal traffic, with carloads down 31.9% in 2012 on a year over year basis.

In early 2012, Ackman helped get Hunter Harrison elected as CEO. Ackman believes that new management will be able to help turnaround the rail company, which has lagged behind its peers on profitability measures since Fred Green took over in 2006. New CEO Harrison managed to pull off a turnaround as the former CEO of Canadian National Railway. Harrison expects to be able to cut operating expenses to 65% of sales by the end of 2015, versus its current 80%.

Trains have received the glory for transporting coal in the past, but now the market for moving oil is heating up. Compared to trucks, trains are faster and more economical. For pipelines, there has been an outpour of public and government disapproval for adding additional pipeline. One big initiative is that Canadian Pacific is getting into the Bakken shipments, expecting to ship out nearly 50,000 barrels of oil per day from the area.

Pipelines continue to carry the majority of the crude oil shipped around North America, but the tide is changing. Rail infrastructure has decades old rights of ways already in place and is becoming a more sensible way of moving oil products. Almost 10% of the oil moved across the U.S. will be by rail for 2013. During 2008 only 20,000 barrels of crude oil moved on trains per day in the U.S., and that number was up to 500,000 by the end of 2012. 

Over the last six months, Canadian Pacific has seen its stock up 25% as CEO Harrison gets to work, announcing plans to cut jobs and look towards selling unproductive assets. Harrison hopes to eliminate 4,500 total jobs by 2016. The company forecasts annual revenue growth of 4 percent to 7 percent by 2016, a good portion of which Harrison said would come from increasing shipments of crude oil.

While Canadian Pacific’s third quarter operating margin came in at 26%, the highest in two years, Canadian Pacific has still underperformed its major competitor over the long-term:

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p><strong><em>5-Year Average Operating Margin</em></strong></p> </td> </tr> <tr> <td> <p><em>Canadian Pacific</em></p> </td> <td> <p>22%</p> </td> </tr> <tr> <td> <p><em>Canadian National</em></p> </td> <td> <p>35%</p> </td> </tr> </tbody> </table>

Also making a big bet on the Canadian rail industry is Bill Gates, except not on Canadian Pacific. Gates' bet is on Canadian National Railway, and the mega-billionaire now owns 12% of the railroad company. His ownership comes by way of Cascade Investment, which manages his personal fortune, and the Bill & Melinda Gates Foundation Trust (check out what else Gates owns).

Canadian Pacific still has a long way to go with its turnaround, but a strengthening of efficiency should provide investors with upside potential. With the earnings growth that Wall Street expects, Canadian Pacific appears to be offering investors one of the best growth at a reasonable price opportunities, trading at the lowest PEG ratio of its competitors:

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p><strong>Price to Earnings to Growth</strong></p> </td> </tr> <tr> <td> <p><em>Canadian Pacific</em></p> </td> <td> <p>1.44</p> </td> </tr> <tr> <td> <p><em>Canadian National </em></p> </td> <td> <p>2.11</p> </td> </tr> <tr> <td> <p><em>Genesee & Wyoming</em><em></em></p> </td> <td> <p>2.77</p> </td> </tr> </tbody> </table>

We are encouraged that Ackman still holds Canadian Pacific as its top stock pick, and despite focus on Herbalife the hedge fund should continue to help support management with orchestrating a turnaround (see Ackman’s newest picks).

mhargra has no position in any stocks mentioned. The Motley Fool recommends Canadian National Railway and Genesee & Wyoming. 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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