Hedge-fund manager Bill Ackman has placed 33% of his capital in this one stock
Bill Ackman is known for seeking deep value and having a highly concentrated portfolio with his top best investment ideas. In many ways, he is an active contrarian investor focusing on going the opposite way of the general crowd. His most famous maneuvers were when he shorted MBIA’s (Municipal Bond Insurance Association) bonds during the 2008 financial crisis. Recently, he gave up his battle against Herbalife where he had a $1 billion short because he meant that the company was a pyramid scheme.
Bill Ackman’s portfolio is very interesting, because it differs from standard portfolio theory. It’s very concentrated and the securities are all operating in the same country, namely the US.
Sector-wise, Ackman has a non-traditional portfolio management style with over 50% in consumer discretionary following 19% in information technology. The smaller positions are divided between 11% in consumer staples, 11 % in real estates and 9 % in materials.
Now, let’s disclose Ackman’s big money bet! The company is called Restaurant Brands Internationals (NYSE:QSR) and operates within the restaurant segment. The company owns, operates and franchises quick service restaurants under the brands Tim Hortons, Burger King and Popeye’s. As of December 2017, Restaurant Brands Internationals owned or franchised a total of 4,748 Tim Horton restaurants, 16,767 Burger King restaurants and 2,892 Popeye restaurants.
One might assume that Ackman is buying the company mainly for its ownership in Burger King. Last year, McDonalds (NYSE:MCD) gained 22% while Restaurant Brands International only gained 3.6%. Is the company bound for a boost in its share-price? When looking at the consensus estimates, it seems like analysts have a hard time figuring out the value of this company which is now trading at $57.4 or 73,9 CAD. The bull case states that the fair value is $95.6 or 122.2 CAD which gives a 66% upside potential from the current price. The bear case is that fair value is $33 or 43 CAD which gives a 50% downside potential from the current price. However, the mean consensus is a fair price at $66 or 86.1 CAD which is 16% up from the current price.
Restaurant Brands International has paid uninterrupted dividends for 5 years and has generated positive free cash flow in each of the last 10 years. However, the company has substantial amounts of debt since the net debt / EBIT is close to 6 (we prefer it to be closer to 2). But here again one could argue that the operating margin (OM) is very high at 44% and the return on equity (ROE) has been somewhat stable at 15% showing signs of a great business.
It’s not hard to understand why analysts can’t wrap their head around this investment, but for those who can, there’s considerable potential in both directions.
The author down not own shares in Restaurant Brands International