Bill Ackman

Bill Ackman’s Pershing Square Capital Management LP. is down 7.5% for the period of Apr-June, and up 3.3% year to date, the fund was up 11% in the last quarter that ended on March 2012. The quarterly letter to investors discusses the fund’s decision to let go of its stake in Citigroup Inc. (NYSE:C). Pershing has now added The Procter & Gamble Company (NYSE:PG) to its portfolio.

Lets take a look at how Ackman justifies the liquidation and addition of Pershing’s investments in Citi and Procter & Gamble respectively:

Citigroup

The letter discusses how Ackman is wary of investing in large financial institutions, owing to the regulatory risks and lack of transparency. The fund bought stake in Citi back in April 2010, when it had a a strong balance sheet, favorable lending policy, smart administration, and a strong standing in global banking.  Afterwards the worth of credit weakened Europe, and the stringent regulatory policies applied by governments resulted in deterioration in financial services. Over the two years of Pershing’s ownership in Citigroup, the stock price consistently declined, which heightened the risks associated with this investment.

Pershing admits that they settled for lower profits when it comes to Citi, and it indirectly overpayed for this investment. In the end the decision was made to sell the Citi stake after the infamous LIBOR scandal, and due to the general uneasiness that Ackman felt over this investment. The letter assures that Pershing knows better and easier ways of earning money, and has therefore transferred capital to Procter & Gamble instead.

Procter & Gamble

Pershing has invested in P&G based on its predictability, simple cash-flow, and handsome potential for growth.  The current value of stock is $65, which is largely undervalued in Ackman’s assessment. The largest consumer goods company of the world has huge potential to expand and improve its value.

The fund has continued stakes in J.C. Penney Company, Inc. (NYSE:JCP), Canadian Pacific Railway Limited (TSE:CP) (NYSE:CP), General Growth Properties Inc (NYSE:GGP),  and Justice Holdings Ltd (LON:JUSH) / Burger King Holdings, Inc. (NYSE:BKC).

 J.C. Penney Company, Inc.

The letter expresses confidence in the administration of J.C. Penney Company CEO, Ron Johnson, and plans to stick with this investment despite of odds like fall in share price and decline in revenues in the first quarter. JCP has a strong balance sheet, which is capable of offsetting even further decline in sales. The company has several upcoming shop openings and is cutting operating costs, this will transform to cash flow in the next fiscal year.

Canadian Pacific Railway Ltd. 

Pershing Square has high expectations for Canadian Pacific after the election of new CEO and board of directors, of which eight members were suggested by Pershing.

Burger King Worldwide Holdings

BK finalized a merger with Justice Holdings, and Pershing reiterates that it has potential for international growth and profit generation in the US market which is reflected in the modest 8% profit that Pershing has gained on this investment.

Alexander & Baldwin Holdings, Inc.  and Matson, Inc.

Last month A&B split into two separate entities; Alexander & Baldwin real estate company, and the Matson shipping company. Therefore Pershing now owns shares in each company, and the present pricing of their separate shares offers a 44% increase in value over the original investment.

The letter also discusses changes in the Pershing’s investment team; Ben Hakim, partner at The Blackstone Group L.P. (NYSE:BX), will be joining after Labor Day. Hakim has previously advised on many of Pershing’s important investments. He will not only contribute to the investment side of Pershing, but will also play major role in the establishment of Pershing Square Holdings, alongside Ackman. Hakim is a graduate from Cornell University and has previously worked at PricewaterhouseCoopers.  The Blackstone Group L.P. (NYSE:BX) has so far contributed four members to the investment team of Pershing’s, namely, Ali Namvar, Shane Dinneen, Brian Welch, and Ben Hakim.