The Value-Investing Superstar Behind This IPO
Apr 10th 2012 12:28PM
Updated Apr 10th 2012 12:32PM
Activist investor Bill Ackman is not new to the quick-service restaurant world. He seems to have a formula for what works in this business, and he's not afraid to tell CEOs about it. So far he is two-for-two, and I am predicting a three-peat with his latest challenge.
The Fry Master
I'm not about to say a great investor can necessarily run a great business -- just look at Sears. But I am impressed by a good track record, and Mr. Ackman fills that requisite with ease. The 45-year-old value guru at the head of hedge fund Pershing Square is a fast-food veteran. After taking large positions in both McDonald's (NYS: MCD) and Wendy's (NYS: WEN) , Ackman was able to influence the direction of both of those companies, resulting in increased profits for both the businesses and their shareholders.
Some argue that Burger King is a fundamentally weaker business than McDonald's and that the same principles do not apply. I know it's hard to remember, but McDonald's wasn't always the cash printing machine it is today.
Begin flashback sequence...
It's almost a decade ago. Your child's college fund is recovering from your Yahoo! investment, and you tend to cry a little less at night.
Mickey D's is trading in the low 20s and market sentiment is generally negative. The company hasn't had a solid marketing campaign in years. Same-store sales have been and are continuing to dwindle. Most important, consumers don't really have any attraction to McDonald's. Going into one is a last resort.
Enter Bill Ackman.
Ackman realizes the company is making its money not from quick-service operations, but from rent and franchise fees.
Pershing buys 5% of the company in 2005 and lets McDonald's management in on the secret. Ackman lobbies for a position on the board and a shift in strategy. Though he never gets his board seat, McDonald's put some of his strategy suggestions to good use.
It's 2007. The market couldn't possibly go down. You should probably invest your entire nest egg in mortgage-backed securities.
On the food front, quick-service restaurants have enjoyed great gains except for one -- Wendy's.
After a series of operational failures, the company is trading at the lowest EV/EBITDA of any fast-food chain, and looking to be acquired by anyone with a checkbook. Ackman moves in and at one point owns nearly 15% of the company.
He successfully encourages a spinoff of Tim Hortons as well as a repeat of the McDonald's treatment -- and Wendy's recently became the No. 2 burger chain in U.S. sales.
Triple flashback (last one, I promise)...
2011. The hit man you hired to "find" your financial advisor came up empty-handed, but the market has at least been kind.
Fortune Brands is reeling after making many high-priced acquisitions at possibly the worst time ever.
Same story. Ackman gets hold of the stock and encourages a spinoff. Fortune Brands becomes Beam and Fortune Brands Home and Security. In October, Ackman publicly loves on Fortune Brands Home and Security at $14 and says it's worth $22 in less than a year. Today it's trading at $21.54.
Back to the future
In as little as 60 days, Burger King will once again be a publicly traded company. Ackman's London investment vehicle -- Justice Holdings -- owns roughly 30% of the company. Ackman himself owns around 10%.
His plan? You guessed it. Separate the operational Burger King from the land-holding and royalty-collecting Burger King. In addition to that, increase international franchise numbers by an astounding amount -- a smart move since Burger King still has one of the most recognizable brands in the world.
Past results do not guarantee future performance
Like anyone on Earth, Ackman has made mistakes. Now-defunct Borders, for example, was a bad bet for Pershing. Target (NYS: TGT) was another failed initiative. As an activist, Ackman tried to get on the board of Target in 2009 and change the direction of the suffering company. Target's shareholders overwhelmingly voted in favor of the incumbent board members and left the hedge fund manager outside in the rain. Over the course of the next year, the value of his shares in Target dropped 90% as the company's profits tumbled.
But even with those sour apples, Pershing Square was able to grow its assets under management from $6.7 billion in 2008, right before the crash, to over $11 billion today. When the average hedge fund is underperforming the S&P, this is an extremely impressive return.
Wendy's or Borders?
Which will it be for Ackman's BK Investment? Only time will tell, but I see a lot of similarities to both Wendy's and McDonald's. Ackman knows how this game is played and how he can add value to it. When reports come out that Burger King is selling company-owned stores and refocusing on franchised stores, you'll know his plan is in action. If that happens post-IPO, it may be time to buy.
As the Burger King IPO approaches and we are privy to more information, keep an eye on this next fast-food company to get a market makeover.
Following the moves of investing superstars like Bill Ackman can make stock picking a whole lot easier, as long as you still do your own homework and make sure the investment makes sense for you. If you want to follow the smart money, check out our free report "The Stocks Only the Smartest Investors are Buying."
At the time this article was published Fool contributor Michael Lewis owns no shares of the above mentioned stocks. Motley Fool newsletter services have recommended buying shares of McDonald's. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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