On the other hand, as stated earlier, Pershing Square’s investment in Air Products & Chemicals, Inc. (NYSE:APD) had a positive contribution to its returns so far this year, as the stock has climbed by over 10% year-to-date. The fund owns 20.55 million shares, or 9.5% of the company, according to a recent filing and the investment had a positive impact of 1.4% to the gross returns in the first quarter. In the letter to investors, Ackman pointed out Air Products & Chemicals, Inc. (NYSE:APD)’s bottom-line growth, praising the leadership of CEO Seifi Ghasemi, under which the company delivered double-digit EPS growth in the last seven consecutive quarters, despite facing foreign exchange headwinds. For the fiscal second quarter (ended March 31), Air Products and Chemicals posted EPS of $1.55, up by 17% on the year and slightly beating the estimates. The growth in EPS was driven by a 500 basis points increase in margins, which amounted to 23.4% for the quarter.
“While the margin improvement was impressive, the company’s volume trends reflected the current economic environment and muted global growth. Sales were $2.3 billion, down 6%, due to decreased energy pass-through (-3%) and FX headwinds (-3%). Underlying growth was flat, on flat volume and pricing. In North America and Europe, APD continued to grow price 1% to 2%, a level it has achieved since Seifi joined. APD can control pricing more than volume, so we view this as a positive sign that the company should be able to sustain modest price growth if and when global growth and volume returns,” the letter added.
Last week, Air Products & Chemicals, Inc. (NYSE:APD) said it will sell its Performance Materials Division to Evonik Industries AG for $3.8 billion; the Performance Materials Division had been earlier planned for a spin-off later this year. Pershing considers the move to sell the division favorable, because it will generate cash proceeds, which can be returned to shareholders or invested.
“The company will incur substantial taxes on the sale, but, in light of the high purchase price, reflecting its value to a strategic buyer, the net proceeds are likely to generate more value than could be achieved in a spinoff. APD intends to proceed with the spinoff or sale of the EMD later this year, subject to market conditions.”
Another Ackman’s investment that has been widely discussed is his $1.0 billion short bet against Herbalife Ltd. (NYSE:HLF). In the letter, the investor pointed out Herbalife’s recent announcement that its talks with the Federal Trade Commission are in an advanced state, and might conclude with a $200 million settlement, although a possibility of litigation was also not excluded. Ackman said that the market mainly paid attention to the small size of the settlement, which will not affect Herbalife very significantly, but failed to take into account that the FTC might take Herbalife Ltd. (NYSE:HLF) to the court “for being a pyramid scheme” or that “a settlement “injunctive and other relief” may materially impair HLF’s future profitability and growth potential.” Ackman added that the FTC could demand similar safeguards and restrictions for Herbalife as it asked for energy drink seller Vemma, another recent pyramid scheme litigation.
“We continue to believe that HLF’s share price assigns little to no downside for a material adverse regulatory outcome, nor is it justified by a business of HLF’s poor quality. As a result, we believe that HLF currently represents an extremely attractive risk-reward for short sellers,” Ackman concluded.
In the second part of the article, we are going to take a look at Ackman’s comments regarding some other investments that affected Pershing Square’s returns in the first quarter.
