This Junk Food Company Is a Healthy Income Bet

Billionaire activist investor Bill Ackman is having a rough year. His Pershing Square Capital Management hedge fund has already lost over 26% this year.
This comes on the heels of a 20% loss for Pershing Square in 2015 – its worst year ever. The big overhang for Ackman’s portfolio is Valeant Pharmaceuticals International (NYSE: VRX). The pharma stock has fallen 70% in 2016 and is off more than 90% since it hit its all-time high of $262 less than a year ago.
Ackman does have other holdings, but they’re performing poorly as well. Canadian Pacific Railway (NYSE: CP) – where Ackman’s pushing for a merger with Norfolk Southern (NYSE: NSC) – has fallen 30% over the last 12 months. And Zoetis (NYSE: ZTS), the animal pharma company, is down 15%.
There are a handful of other Ackman holdings, many of which are also down on the year. Yet the one bright spot has been his largest holding, Mondelez Interntaional (NASDAQ: MDLZ). Shares of the junk food company famous for Oreo cookies are up 18% for the last year.

Portfolio Reshuffling

With Ackman’s portfolio down so much, you’d expect some reshuffling on his part. However, what you wouldn’t expect is that he’s selling off his top holding.
Ackman sold off 20 million Mondelez shares last week, which inadvertently pushed shares down. The stock is down 9% in 2016, but it also offers a 1.7% dividend yield and has a $6 billion buyback plan in place.
In a note to investors last week, Ackman stated that he continues to believe in the potential for operating improvements and margin expansion at Mondelez. The Mondelez sale was only a fifth of his position. Pershing Square still owns 5.6% of the company.
Ackman appears to be shoring up his own balance sheet by raising some cash after the Valeant collapse. But it’s also about portfolio management, as Mondelez had become a huge part of his hedge fund’s portfolio given the fall in all its other stocks. Thus, the sale could be a buying opportunity for investors.

Ackman’s Thesis

The big question is what Ackman has in store for Mondelez. His key thesis could be to get Mondelez sold to the likes of Kraft Heinz (NASDAQ: KHC).
Recall that fellow billionaire Nelson Peltz, who runs Trian Partners, is also involved with Mondelez. His fund has pushed for Mondelez to merge with the food business of PepsiCo (NYSE: PEP). Both activist investors have agreed that a significant reduction in costs or an outright sale of Mondelez is what’s best.
3G Capital and Berkshire Hathaway’s (NYSE: BRK-B) Warren Buffett helped merge Kraft and Heinz to create a food powerhouse. There’s been much speculation about which company might be on Kraft Heinz’s radar as a buyout target, with Mondelez being one of the top candidates.
Mondelez has also been trying to grow its margins for a few years now. Once the Valeant issues taper, look for Ackman to get refocused on helping Peltz push for quick action on the margin improvement front.
Mondelez implemented zero-based budgeting a couple years ago, which justifies each cost. The other margin expansion opportunity is a longer-term play, which includes upgrading its manufacturing facilities for improved efficiency. Its focus on improved inventory levels and restructuring plans are expected to save $1.5 billion a year starting in 2018.
However, Kraft would be ready for another major purchase before then. 3G Capital started cutting costs at Kraft with headcount reductions shortly after the Heinz purchase in 2015. Mondelez’s current lackluster margins would be something that 3G could help with, as the Brazilian buyout firm is known for its relentless cost-cutting abilities.
Although Mondelez has one of the lower dividend yields in the food industry, it’s still very enticing given the opportunities the company has for a turnaround – plus the potential for a buyout.

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