Ackman Sees Lowe's Upside Like His 2011 Bet on Canadian Pacific

(Bloomberg) -- Bill Ackman said he sees significant upside for home-improvement retailer Lowe’s Cos., much like he did almost seven years ago with one of his most successful investments, Canadian Pacific Railway Ltd.

When Ackman’s Pershing Square Capital Management took its initial investment in CP Rail in 2011, the company had underperformed its larger rival, Canadian National Railway Co., for more than decade -- much like Lowe’s is now underperforming its rival Home Depot Inc.

At CP, Ackman said managers claimed that structural differences and weather explained the company’s underperformance. “We disagreed, believing that a different management approach would substantially improve the company’s performance,” he said Thursday in a letter to investors.

At CP, Ackman installed Hunter Harrison as chief executive officer. Harrison drove operational improvements at the railway and returned about $2.6 billion to Ackman on his investment. The activist investor said he sees similar opportunities for Lowe’s under its new CEO, Marvin Ellison. He said he expects Ellison to detail his plans for overhauling the retailer in December at the company’s analyst day.

“Mr. Ellison is off to a fast start assembling a new senior executive team to organize the Lowe’s turnaround,” Ackman said. “We look forward to watching him perform.”

The billionaire investor disclosed his $1 billion investment in Lowe’s in May but had said little publicly about the investment since then.

A representative for Lowe’s wasn’t immediately available for comment.

Directors Appointed

Ackmanisn’t the only activist invested in Lowe’s. The retailer said in January that it would appoint three new directors to its board after D.E. Shaw & Co. took an active stake in the company. In the months since, Lowe’s Chief Executive Officer Robert Niblock, a 25-year Lowe’s veteran, announced his retirement, with former J.C. Penney Co. CEO Ellison taking the reins on July 2.

Pershing Square said this week it it had returned 12.7 percent on its investments this year through August 7. The biggest contributors in the first half of the year were its investments in Chipotle Mexican Grill Inc., Automatic Data Processing Inc. and Lowe’s.

Ellison, who was a top-ranked executive at Home Depot until becoming chief of department-store chain J.C. Penney, has re-tooled Lowe’s top management structure with new roles, including ones overseeing merchandising and stores.

Lowe’s, based in Mooresville, North Carolina, said Tuesday that it hired Donald Frieson, a former Walmart Inc. executive, to run supply chain as it puts a renewed focus on improving how its online and physical stores work together.

Shares Up

Lowe’s shares are already trading 15 percent higher than Ackman’s cost, he said in the letter, and currently trades at 18 times Pershing Square’s estimates for earnings this year. Home Depot is trading at 21 times analysts estimates.

“We believe there is large upside potential to Lowe’s if it can narrow the performance gap with Home Depot as it is likely that closing the performance gap will cause the market to reward the company with an increased multiple on higher earnings that reflect the company’s underlying business quality and growth potential," Ackman said.

The deadline for Ackman to nominate directors for the board of ADP is set to pass Thursday without the activist putting forth a slate of nominees. Ackman lost a high-profile proxy fight last year at ADP and warned that if the company didn’t deliver on its promises, he might launch another boardroom battle this year.

Ackman said Thursday that ADP’s new revenue growth and operating margin targets announced during the second quarter were “substantial increases” over management’s prior guidance. While calling that a “positive step,” Ackman said he believes there “continues to be a significant opportunity for additional operational margin expansion in the coming years as ADP closes the gap in employer service relative to its structural potential.”

Shares in ADP have risen about 23 percent since Ackman lost his proxy fight on Nov. 7, more than double the gain in the S&P 500 Index. Ackman has cashed out some of that investment, selling about $125 million worth of his holdings in March.

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