Tuesday, November 23, 2010

Ackman's 3Q 2010 Letter

Some comments on Kraft and ADP from Bill Ackman in his latest letter:

We continue to like the "new Kraft" for its underappreciated international growth opportunities, as Kraft leverages Cadbury's well-established distribution network particularly in emerging markets. We also believe the company will significantly improve its profit margins, which are among the lowest of its peers. 

Thus far, our thesis appears to be on track. Year to date, base Kraft EBIT margins (excluding corporate expense) are up from 14.8% to 15.4%. We believe margins will continue to increase in the coming quarters, particularly as the company delivers its expected $750 million of cost savings from the combined Kraft/Cadbury operations. 

From a valuation perspective, based on the attractiveness of the categories in which Kraft participates, and its strong and growing emerging market presence, we think the stock is inexpensive at roughly 11x 2012 earnings.  

The opportunity to acquire ADP at a discount to intrinsic value arose as ADP's earnings and cash flow weakened with the economy. Retention rates and new business bookings declined substantially as recession-related pressures drove some ADP customers into liquidation, led to headcount reductions, and otherwise delayed new business. Lower average client fund balances coupled with low interest rates also contributed to weakness in ADP's earnings. 

Later he added...

...ADP continues to wisely deploy capital in high-return acquisitions, substantial share repurchases, and dividends. Over the past five years, the company has repurchased more than 20% of its stock, made a number of intelligent acquisitions of complementary product offerings, while divesting non-core operations through sale or spinoff. 

Check out the full letter.


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