Pershing Square 2018 Annual Presentation “Creating Value Through Activism”
Pershing Square Capital Management annual presentation for the year ended December 31, 2018.
Q4 hedge fund letters, conference, scoops etc
Chairperson’s Introduction
Board of Directors of PSH
All directors are independent of Manager other than Nicholas Botta
- Anne Farlow – Chairperson
- Richard Battey
- Nicholas Botta
- William Scott
- Bronwyn Curtis (as of April 2018)
- Richard Wohanka (as of April 2018)
PSH Board Process
- Quarterly in-person meetings, telephonic meetings as needed
- Review investment performance and portfolio
- Review operational risk management
- Shareholder register
- Investor relations update
- Expenses
- Any regulatory matters
- Additional matters
2018 Corporate Actions
- Elected two new independent directors, Bronwyn Curtis and Richard Wohanka, to the PSH Board in April 2018
- Removed PSH’s 99% ownership limit in April 2018, which creates the potential for additional demand for PSH shares
- Completed a $300 million company tender in May 2018 at a 20.5% discount to NAV which reduced public shares outstanding by 9.5%
PSCM affiliates have purchased more than $520 million of PSH shares in the open market since May 2018
The combination of the company tender and share purchase by PSCM affiliates has reduced the free float of PSH by 24.5% since April 2018
PSH Initiates a Quarterly Dividend
Beginning Q1 2019, PSH will pay a quarterly dividend of $0.10 per share, a 2.5% yield at the current PSH share price
- PSH’s current dividend yield is similar to that of the S&P 500
- PSH is likely to continue investing primarily in companies in the S&P 500
- The average dividend yield of the S&P 500 is ~2.1%
- PSH’s dividend as a percent of NAV is 1.9% which is comparable to the S&P 500 dividend yield
Benefits of a Quarterly Dividend
- Expands the universe of potential PSH investors who prefer or require dividends as part of their investment strategy
- Dividend will represent return of capital at NAV which can be reinvested in PSH shares at a discount to NAV
- Optional dividend reinvestment program (“DRIP”) will facilitate automatic reinvestment in PSH shares at market price
- DRIP will create incremental demand for PSH shares
- Further emphasizes that PSH is an attractive alternative to a S&P 500 portfolio
2018 PSH Performance Overview
Pershing Square Holdings, Ltd. Annual Net Returns
2019 is Off to A Strong Start
Substantial Outperformance in a Volatile Market
PSH Outperformance vs. S&P 500 in 2018 and YTD 2019 (2/12/2019)
Cumulative Net Returns Since Inception (1/1/04)
Pershing Square, L.P. Net Returns vs. S&P 500 through February 12, 2019
Long-Term Performance in Up & Down Markets
Pershing Square, L.P. Net Returns vs. S&P 500 (1/1/2004 through 1/31/2019)
2018 Contributors (Gross Returns)
2018 Detractors (Gross Returns)
Long and Short Attribution (Gross Returns)
Total Assets Under Management
Business and Organizational Update
Our 2018 Strategic Initiatives: What We Said
Our 2018 Strategic Initiatives: What We Did
- Reduced headcount from 74 employees at peak to 38 employees today resulting in a more focused and investment-centric organization
- Opportunistically redeployed capital into four new investments that are aligned with our core investment principles
- Constructively engaged with our portfolio companies to drive long- term value creation*
2018 Was A Year Of Transition Organizationally
- Smaller investment-centric organization
- Bill delegated day-to-day operational and investor relations duties to other members of the firm
- Minimal media footprint
- Pershing Square Advisory Board
- Added Dawn Lepore, former CEO and President of Drugstore.com
- Added Ali Namvar, former investment team member
- Board retirements: Marty Peretz and Ed Meyer
- Moving to 787 11th Avenue in Q2 2019
Stable Path Ahead
Limited Organizational Change
- We have the right team in place to compound our capital for years without any meaningful headcount changes
Stable Capital Base
- PSH represents ~67%1 of the equity of Pershing Square core funds and 71%1 of the assets under management (including PSH bond proceeds)
Consistent Execution
- Our investment strategy has a long and successful track record
- Adhering to our core investment principles has enabled us to outperform the S&P 500 in a volatile market in 2018 and year-to-date in 2019
New Organizational Chart
Investment Team Bios
New Idea Generation Reflects Core Principles
New investments in 2018 are in high-quality, simple, predictable, free-cash- flow-generative businesses with formidable barriers to entry
Creating Value Through Activism
In 2018, Pershing Square collaborated with our portfolio companies to create long-term value
ADP
- Constructively engaged with company as it accelerated its long-term business transformation
Chipotle
- Ali Namvar and Matthew Paull joined the board in December 2016
- Brian Niccol, formerly CEO of Taco Bell, joined as CEO of Chipotle in March 2018
- Brian and his team have made significant progress turning around Chipotle and reaccelerating growth
Lowe's
- Shared our views on potential CEO candidates with search committee
- Company recruited Marvin Ellison as CEO, our first choice candidate
- Operational turnaround is underway
United Technologies
- Privately engaged with management and highlighted the value creation potential of a breakup of the company
- In November 2018, the company announced its intention to separate into three independent companies (Aerospace, Otis, and Carrier)
The Pershing Square Portfolio: Higher Business Quality and Earnings Growth than Market
We expect our portfolio to compound earnings and intrinsic value at a much higher rate than the market (analysis below excludes HHC, FNMA, FMCC)
Our portfolio trades at a higher earnings multiple than the market, but we believe that it undervalues the higher quality and stronger earnings growth of our portfolio companies
The Pershing Square Portfolio: Discounted Valuation at PSH
Pershing Square Holdings vs. a Hedge Fund
PSH is an Investment Holding Company
- The Pershing Square investment strategy has a long-term track record
- PSLP’s compound annual net return, since inception in 2004, is 13.8% vs. 4% for the S&P 500 over the same period1
- PSH’s current 27% discount to NAV implies a 0.73x price / book value ratio
In our view, a business with a long-term return on equity of ~14% should trade significantly above 0.73x price / book value
Pershing Square Holdings vs. the S&P 500
We Believe PSH is an Attractive Alternative to the S&P 500
- Access to a portfolio of high-quality, simple, predictable, free-cash-flow- generative, generally large cap U.S. companies at a 27% discount to NAV1
- In light of the discount to NAV, the ‘look-through’ earnings multiple of the PSH portfolio is similar to that of the S&P 500 despite earnings growth well in excess of the S&P 500
- We typically invest in conservatively financed, non-cyclical, economically resilient businesses which tend to outperform in volatile market environments
- Activism can drive meaningful improvements to the operating performance of companies unlike passive investing
- Investors do not pay an incentive fee until PSH achieves ~22% NAV appreciation
PSCM affiliates have purchased more than $520 million of PSH shares in the open market since May 2018. This investment demonstrates our confidence in the undervaluation of PSH and its long-term potential.
Current Portfolio Update
Chipotle Mexican Grill (“CMG”)
Chipotle is now executing on its vast unrealized growth potential
2018 was a year of organizational transformation
- Brian Niccol, formerly CEO of Taco Bell, joined Chipotle as CEO in March
- Executive team strengthened with external hires in the roles of Chief Marketing Officer, Chief People Officer, Chief Legal Officer, and Chief Development Officer
- Corporate restructuring including HQ relocation and the elimination of two layers of management
- Introduction of “stage-gate” process to test, learn, and iterate on new initiatives
Reigniting same-store sales growth is the key priority for 2019
- Key growth levers identified for digital, marketing, menu, and operations
- Early signs that the new strategy is working have already emerged
- SSS growth of 6.1% in Q4, including traffic growth of 0%1
- Robust customer response to “For Real” marketing campaign in October, delivery partnership with DoorDash, and the launch of Lifestyle Bowls in January
Pershing Square’s Constructive Activism
CMG Share Price Performance Since Inception
CMG’s share price increased 49% in 2018 and 37% year-to-date in 2019
Automatic Data Processing (“ADP”)
ADP is substantially transforming its business
- ADP has accelerated numerous transformation initiatives
- Accelerating Service Alignment Initiative (cost cutting and facilities consolidation program)
- Announced Early Retirement Program
- Accelerating roll-out of Next Gen (Enterprise / large corporation) product offering
- Strengthening talent and performance culture, aligning management objectives around ADP’s business transformation (e.g. establishment of a Transformation Office)
Achieving new mid-term targets will drive significant EPS growth
- Guidance implies ~$7 of EPS in FY2021 vs. ~$4 at the time of our initial investment
- Targeting 23% to 25% EBIT margins vs. structural potential of ~32%1
- New targets still only capture a fraction of ADP’s full potential
We believe that achieving ADP’s structural potential will drive substantial shareholder value
- ADP trades at ~24x earnings – a discount to historical levels – despite improved organic growth and accelerated EPS growth
ADP Share Price Performance Since Inception
ADP’s share price including dividends increased 14% in 2018 and 14% year-to-date in 2019
Restaurant Brands International (“QSR”)
QSR is a high-quality business with significant long-term growth potential trading at a discounted valuation
Continued strong business performance in 2018
- Net unit growth of 5%, including 6% at Burger King
- Healthy same-store-sales growth at Burger King (+2%) and modest growth at Tim Hortons (+1%)
- Tim Hortons growth of 2% in Q4 represents accelerating sales momentum
- Organic EBITDA growth of 5% and EPS growth in excess of 30%
Remains cheap relative to intrinsic value and peers
- Trades at ~22x our estimate of 2019 free cash flow per share, a discount to peers
- Free option on future value-creating acquisitions
Inaugural investor day in May to highlight QSR’s unique long-term unit growth opportunity
QSR Share Price Performance Since Inception
QSR’s share price including dividends decreased 12% in 2018 and increased 23% year-to-date in 2019
Lowe’s (“LOW”)
Lowe’s is a high-quality business with strong new leadership that is committed to narrowing the performance gap with Home Depot
New management team has relevant track record of success
- New CEO Marvin Ellison played important role in turnaround at Home Depot
- New leadership team includes several former Home Depot executives
Credible plan to narrow the performance gap with Home Depot
- Lowe’s current EBIT margin is 9.3% versus 14.5% at Home Depot
- Management targets a 12% EBIT margin over the medium-term
- We believe further upside to margins and sales productivity is likely over time
Secular housing trends support long-term growth and reduce cyclicality
- Key housing metrics remain below long-term average levels
- Aging housing stock (~30yrs) requires significant repair and maintenance
- Lowe’s derives a large portion of its revenue from repair and maintenance
LOW Share Price Performance Since Inception
LOW’s share price including dividends increased 8% from our average cost at inception to December 31, 2018, and 8% year-to-date in 2019
See the full slides below.