Value Investing Congress: Bill Ackman’s Presentation on Fortune Brands

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Value Investing Congress: Bill Ackman's Presentation on Fortune BrandsNote to readers: I am writing all these posts very informally. I have found that readers like this the best, and it enables me to take the most notes possible and get them up in real time. I will be updating the presentations in real time, and tweeting, so make sure to check back frequently or on Twitter, Facebook or Feedburner. Also you can check out this website announcement Value Investing Congress Website Announcement.

All notes are the speakers, except words in the brackets which are mine.

Bill Ackman is the Managing Member and Portfolio Manager of Pershing Square Capital Management, L.P., a concentrated research-intensive fundamental value oriented long short hedge fund. Pershing Square has ~$14billion under management and has produced , Bill Ackman’s short of MBIA is the topic of Confidence Game: How Hedge Fund Manager Bill Ackman Called Wall Street’s Bluff, by Christine Richard. I am currently reading the book and highly recommend it to investors of all levels.

Pershing Square has played an active role in creating value at companies including McDonald’s, Ceridian Corporation, Longs Drugs, Wendy’s International, and General Growth Properties.

Prior to forming Pershing Square, Bill Ackman co-founded Gotham Partners, L.P., a public and private equity investment partnership. Prior to Gotham Partners, Mr. Ackman began his career in real estate investment banking at Ackman Brothers & Singer, Inc. Mr. Ackman received an MBA from the Harvard Business School and a Bachelor of Arts magna cum laude from Harvard College.

Mr. Ackman’s board memberships include the Board of Dean’s Advisors of the Harvard Business School and a number of not-for-profit boards including the Pershing Square Foundation, a charitable foundation that he founded in 2007.

Bill Ackman introduced his analyst to present Fortune Branks FBHS. It makes faucets, home security like masterlock and other brands.

It is a secular winner, industry leader with significant sale and market share.

Also position for cyclical winner, when housing market normalizes. The business is operating at 60% capacity so it doesnt need much capex.

We think it is worth $22, about 70% above current market price.

This is a classic spin-off (just spun off 14 years ago) so market is not interested. Balance sheet is strong and limits downside risk.

Plumbing contributes 55% of EBIT, it is a very low cost item to improve look of sink.

Cabinets is barely profitable, it has excess capacity. When housing returns it should explode in profitability. FHBS is taking share from competitors.

Security-masterlocks great business, strong market place, stable cash flows. The demand is very stable and there is a chance to grow this under new management.

The windows/doors will improve when housing market improves.


From 2006-2009, company took out large amount of capacity. Company can go from 3.3billion of rev to $5billion with no capex.

1.8x Debt/EBITDA versus 4X for peers. There are no liquidity concerns.

We are not macro, but you need to look at housing market:

Housing stats have tanked to record low levels today. Currently we are at year 4 of the housing peak. We think supply is slowly being soaked up. In 2.5 years we should be reaching equilibrium in housing markets.

Big ticket items not doing well but small ticket items like paint and faucets are doing well.

We think housing is starting to recover. We think housing will be smaller and cheaper. This benefits fortune brands which focuses on needed small items.

EBITDA is $265m currently. If housing starts stay the same they should have a EBIT margin of 10% and EBIT of $330m. This doe not seem too expensive or too cheap, but if there is normalized housing market it is trading at 4x normalized cash flow.

Hard to give an exact valuation but based on varying scenarios of when housing recovers IRR will be attractive.

If housing recovers by 2015, FHBS is worth $27 a share. We think we will get somewhere between moderate and strong recovery. Per share value would be $22.


Upside potential is phenomenal

No liquidity concerns, FCF yields of 6x.


Why this to play housing market? This is very low risk way to play potential housing recovery. I like the safety risk. The housing market will recover within the next five years. In Houston housing levels are booming. Las Vegas is not growing. So it depends where. What is missing is consumer confidence, demonstrated by demonstrations.

Stock market rising, election, Europe stabilizing; could all be catalysts. Some people are renting now just out of fear, but when confidence comes back housing will come back.

Bill Ackman jokes ” I would have been a lot more bullish if I gave the presentation:.

Why spin-off? The company had completely unrelated business with absolutely no synergies. The company owned a golf course.

Bank of America, why you dont like it? Fortune Brands is an easy business to understand, the most complicated thing is predicting when housing will recover. Banks have $2 trillion in assets, they dont even disclose all of them. But at a price I will buy them. We have owned Citi for over a year and it is down 40% since then. I think the mistake was not using a higher discount rate.

We have call options on Hong Kong Dollar, and has a 70-80x possible return but its only a tiny part of our portfolio.

What do you think about JCP? Retail is not the greatest business, but it can be. The Waltons are worth billions of dollar. Ortega, Zara, Don Chang, etc.; in every country big retailers are among the richest people. Ron is one of the best CEOs I ever met. He has the perfect training for the job.

JCP is basically a start up, which is already an established business. Ron gave up economic value to take the job. He has no liquidity for 5 years. Most CEOs have options granted every year, it is in their best interested to see the stock go down. This is very unusual for a CEO. Steve Jobs tried to convince Ron to stay at Apple. I had to negotiate to get as much equity as possibly in JCP.

Lots of retailers have lots of RE? Retailers with undervalued RE, most fail because they rent all their RE. McDonalds was successful because they owned their RE. You want set good RE spots. We told Target keep the buildings and lease the land. You can lease for 75 years on favorable tax basis.

We never invested in any of the SPACs; we have no overhang. We get a 6% equity interest in business.

We are looking for deals, so please call us if you are looking to sell we are looking for $6-$10b EV.

HHC is down a lot now what do you think? The RE is worth a lot. The board is fantastic so is the management team. For each asset a sub-committee approves of transactions.

You seem to be more of an activist investor lately? Our business model is to buy a large minority stake. We buy when company is cheap and work with the company to make it more valuable. JCP let me join the board, which I considered to be a very valuable asset. If you think about pe as a strategy, they would have to pay a high price and raise a lot of money; they have to pay a very high price for control. But then they are in a highly illiquid, expensive position. We have cheap position, which is slightly illiquid. In our hands this stake is worth a lot more.

Whitney Tilson: Bill Ackman made the most money in the shortest amount of time in history. He has combined the best two businesses in the world, hedge funds and private equity.

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