Bill Ackman’s Pershing Square holding will be having its quarterly conference call on Monday at 11 AM EST – November 9th 2015 – We are not sure what Ackman will speak about but we are guessing the chart below will be a topic if not discussed much, then at least on his mind. Since Ackman conducted a call recently we expect this one will be short (by Pershing standards) but it is anyone’s guess.

It is hard to keep up with Valeant news but the latest is that they are holding an investor call at 8AM EST tomorrow morning. Ackman has publicly disagreed with Michael Pearson, CEO, Valeant over Pearson’s style of dealing with the latest controversies surrounding the company. Bill Ackman’s obligation is to defend Pershing Square investors (not VRX investors) so will he do so by attacking VRX again or will he tone back his criticism?

Valeant-VRX-versus-Herbalife-HLF Bill Ackman
Bill Ackman HLF short vs VRX long – one year performance – Chart Via S&P CapIQ

In a note from last week analysts from BMO Capital Markets opined:

We find Mr. Ackman’s comments in the Journal puzzling given his expressed confidence in Mr. Pearson during his conference call. Moreover, we believe that virtually all VRX investors recognize that Mr. Pearson has been the chief architect of Valeant’s strategy since he became CEO in 2008, and they attribute much of the company’s success since then to him personally. Therefore, Valeant’s current issues aside, the prospect of not having Mr. Pearson at the helm is probably further eroding investor confidence, which probably explains today’s weakness.

BMO wrote this before Pearson’s margin loan had been called by Goldman Sachs. However, that news likely will have little bearing on wether or not Pershing, Sequoia, Brave Warrior and other large VRX shareholders are interested in a new CEO or whether they will want to stick with Mike.

11:03AM EST Bill Ackman says investors told him calls too detailed so will scale back – interesting performance-wise – declines due to VRX and PAH – Much of it is due to people thinking we will be forced to sell – but we have largest permanent base of capital – we have seven yr bonds, internal capital and offering on public market – you cannot redeem more than 1/8 capital each Q for many investors. We have done well. We are prepared for snide comments from press.

11:10 MDLZ we are really optimistic and we think margins can be higher. We think volume growth will pick up, GM and OM have been very nice but not yet reflected by huge investment in supply chain – those improvements in margins will come in coming years.

11:15: APD had great quarter – was record Q with margins up over 300% and despite huge FX headwinds numbers were still good. We now have 12 months under new CEO and the results have been spectacular. Also spinning off non core business and we think makes great strategic success and will allow better capital allocation. APD needs very high credit rating (or believes it has to) to serve onsite customers – this business which was spun off was under-levered and now they will be able to put on more leverage. Solely on cost savings you can get to ….
Recent strong performance in Asia also suggests enormous opportunity – and company is being very conservative with guidance assuming zero percent growth worldwide.

11:20 Having struggle in this rail industry, but CP has managed to increase productivity with assets and with workers and has weathered the storm. With restructurings to allow workers on hourly basis this should be an improvement going forward.

Assuming no massive increase in demand will not need to purchase more rail carts for seven years or more. FCF is great over $1B over past nine months. Company issued debt to repurchase some outstanding debt and repurchase share at attractive prices. CP can still buy 8% of float and could go up to 10% of it.

11:25 ZTS down 14% – Bill Ackman thinks it had to do completely with human pharma companies because it is grouped together but it shares nothing in common with its peers – it is diversified supplying vets, ranchers (B2B), – with vets no Government reimbursement really. Zoetis management is trying to get analysts to better understand that. Some of selling could have been caused by the company being included in healthcare ETFs, says Bill Ackman.

Despite huge FX headwinds company still have strong quarter and exceeded consensus.

11:30 Bill Ackman says we already did a lot on VRX and are focusing on cash and business lines and asked ourselves what is impact of shutdown of Philidor (sp?). The only business which is Valeant branded is dermatology business which is very unlikely to be impacted by accounting. Their branded generics across the globe are not even known to us – we expect sales to continue strong. Salix will be strong because FDA approved and doctors will prescribe. The only really question is philador and spec pharma and Jordan will discuss that.

Doctors like VRX products and see difference between VRX and alts – Doctors realize need of specialty pharma against their insurer? enemy – Doctors do not have time to fight with insurers – in dermatology in particular cosmetic impact is important – if something looks greasy patients wont use product or ointment, so they keep this in mind along with costs.

11:35 Doctors noted with acne high copay and prior authorization are important factors. VRX are increasingly selling a product portfolio. Co-pay assistance is not new but is ineffective in retail due to patients losing it etc. also misaligned incentives at pharma where they want to prescribe generic but specialty pharma has less of this issue.and that is why doctors like them. A third of doctors we spoke to who use VRX but dont use specialty were interested in hearing more.

Ackman thinks call tomorrow will be managed better and will not be scripted and that should remove 50% of the current issues. We think they mismanaged the PR aspect of this little crisis. Nothing will change over next ten years, we believe. Tomorrow call will be important, then Valeant will be testifying before Congress on December 9th but they should do well despite the politics. Analyst conference before end of year, 10K in February/March – each event will be confidence inspiring. You have had a panic by a “collection” of events which caused marginal investors to sell, then rumors and mid-call Citron said he would release more info then he withdrew. VRX has been a victim of fear and panic. More disclosure will help especially with spec pharma. We heard great things from physicians about this so there will be re-valuation.

Ackman on $AXP scandal – media misinterpreted -I am not comparing myself to Buffett was comparing VRX scandal to AXP oil scandal. However, if I bought after the crisis maybe the comparison would have made sense.

11:50 People think we may be forced sellers also in HHC we have no plans to sell any of these investments and expect to own them for years although we reassess every day but HHC is much better investment now and so is VRX. CP is a bargain. We get to take advantage even without buying because the company is retiring shares.

 

11:55 PAH had big decline during quarter, this happened to many peers – there were 3 key developments new leadership, company reduced EBITDA guidance, in October lowered guidance again. Company explained worsening exchange rates and…. 3. Company provided details for LT debt financing for acquisition and does not need to dilute – at the next conference call once this deal closes I will be able to discuss more

 

12:00 Bill Ackman on platform companies. When VRX was higher they could not take advantage of their model but we held because they could do good acquisitions. However, today we do not think VRX will do many acquisitions in next 18 months and will use money to de-lever or buy back debt. There is still 3x upside in core assets of company. Platform is similar ditto Nomad – we are large investor we do not try or can trade like a smaller investor. In VRX we have slightly more opportunity but we do not do this often. For example, a year ago we had debate about Burger Kind when price fully reflected the intrinsic value and the company was considering capital return so we elected to hold because we had good mgmt team who could find other acquisitions – we pitched them on acquiring Tim Hortons.

We still think VRX is an attractive investment and lower risk investment at this point. When HLF was at $81 media said the stock will double and Pershing will be wiped out. We stood by our thesis. The FTC investigation came three months later. Media tends to believe things are true based on what the stock price is. We are at “a Herbalife moment for Valeant”. So we think it is a great bargain we will reassess if something changes but based on our best research which is wide in scope we are positive on all our current holdings.

12:05 Platform companies tend to have more volatility because market over-reacts to their ability to be able to make acquisitions – so if you can accept that, you can make a lot of money. People were betting against us personally, but this will go away. Sometimes people think that platform companies are cyclical but they can actually make better acquisitions in poor market conditions.

Earnings for fannie Mae and Freddie Mac were poor because of accounting on derivatives. It is economically neutral but is all just an accounting thing There is emerging consensus they should leave conservatorship. Two trade groups wrote to White House to allow them to re-cap. Research firm in DC says WH is considering this. Several officials have backtracked but we find consensus building that net worth sweep is not working.

Lawsuit by common shareholder in KY is just another chance to overturn net worth sweep.

12:15 Herbalife – total members are down This was first time this happened since they have been trying to run out of new members. Company began using new term active members. Bill Ackman says that the treadmill is always going backwards at HLF/ WE think this is because many members are inactive. They are losing half their members every quarter but they are running out of people to scam and they are running out of hispanics to scam. Like Iceland (which they no longer discuss) Korea, which is strong for now and Malaysia. As business deteroriates we can make money…

Vemma has similar structure to HLF (which ValueWalk reported in depth). At the end of October, a report was released on HLF by Senator Klein which calls HLF an illegal pyramid scheme and calls for NY to treat this as an illegal pyramid scheme. Clip was posted on Youtube where Johnson (CEO) says company built on recruiting. Company claimed copyright infringement and had video taken down. The 10Q has not changed AGs still looking. HLF has spent $101M on legal issues and legal costs are going up. Business continues to weaken and regulators are learning more and will corroborate what we think.

 

Q&A now will be short says Bill Ackman

Ackman has no favorite CEO from The Outsiders it really depends on industry.

Short-seller has never been factor we have considered in terms of risk management – with VRX was very vulnerable. If VRX was private company this would be irrelevant.

We attract a lot of media attention which works well when we are doing well but lots of negative focus when we are down. For VRX we want to encourage them to do well but we look after our shareholders first. We also do not know anyway to make smooth returns we will be down and up we want to buy good businesses and in the past 30 days their business value has not declined at all but the prices went down 25% – we are not losing 25% with a rogue trader – we own these businesses same as 26% ago. So it is a very good time to own Pershing Square.

12:35 WE hope for resolution similar to Vemma which will allow them to operate but will force them into bankruptcy – no time horizon but we are getting closer to a resolution. We do not know who has full video of Michael Johnson but assume whoever gave it to The New York Post gave it to the regulators.

We really like Bethany McClean’s new book on Fannie and Freddie and might hand it out our investor dinner.

Corker actions on GSEs – its up to regulators

No point of view on specific cases

We thought of setting up shadow board for Fannie and Freddie since BOD does not rep shareholders but not sure it is worth time and effort.

Fannie and Freddie were bailed out and they needed that bailout but four years later after profitability

Scott Ferguson of Sachem Head pitched us on Zoetis – he went ahead of us, he proposed to raise outside capital – we thought it was in our best interests to give him the economics on the portion of capital he raised – so we will make a payment to him of 10% of Pershing profit on $500M but we have accrued for that in our returns.

Morale is excellent at Pershing despite recent tough few months. We are all long term and we are really focused on how our businesses are doing.

Notes and live streaming video from Bill Ackman can be found below.

1, 2  - View Full Page