Bill Ackman Thesis: J.C. Penney's Market Positioning and Financial Outlook

Bill Ackman's thesis on J.C. Penney's market positioning and financial outlook is centered around the company's ability to regain its market share and turn around its financials.

J.C. Penney's market share has declined significantly over the years, falling from 1.9% in 2003 to 1.2% in 2012.

Ackman believes that J.C. Penney can regain its market share by offering a unique shopping experience that differentiates it from its competitors.

By making strategic changes to its business model, such as eliminating price discounts and focusing on quality products, J.C. Penney can potentially win back customers and increase its market share.

Bill Ackman's Investment Thesis on J.C. Penney (JCP) highlights a significant opportunity in the retailer. He began purchasing JCP shares at $20.01 in late August 2010.

Ackman's cost basis on JCP is $25.28, but that excludes options. Shares of JCP today trade north of $35 per share.

Pershing Square recognized JCP as a cyclically depressed national retailer at a significant discount to fair value. Ackman still sees shares as inexpensive when you consider the company's asset base and earnings power.

The stock currently trades at only 4.9x 2010 EBITDAP, making it cheap relative to trailing earnings. Sales productivity and margins remain depressed, creating material leverage to a recovery.

JCP owns substantial core and non-core fee and long-term leasehold real estate interests, which adds to the company's value.

For another approach, see: Large Company Growth Index Fund

Making the same moves as Ackman is possible for investors looking to follow his lead. Going short on a vehicle like the iShares 20+ Year Treasury Bond ETF or PIMCO 25+ Year Zero Coupon U.S. ETF would provide gains as yields rise.

You can use ETFs to gain similar exposure. Buying an inverse bond ETF could provide a hedge.

Inverse and leveraged ETFs are a bit quirky, in that they are designed to provide exposure for a single day. Compounding over time can really skew their returns.

These funds have expenses between 0.89% to 4.34% and have AUM between $35M to $500M.

On a similar theme: Bond Market vs Equity Market

Bill Ackman's hedge fund Pershing Square Capital Management has been a significant investor in J.C. Penney, and they've been vocal about their investment thesis.

Ackman began purchasing JCP shares at $20.01 in late August 2010, and Pershing Square's cost basis on JCP is $25.28, excluding options.

Pershing Square recognized an opportunity to invest in a cyclically depressed national retailer at a significant discount to fair value, with JCP trading at only 4.9x 2010 EBITDAP.

For another approach, see: Bill Ackman Pershing Square Capital Management

Sales productivity and margins remain depressed, creating material leverage to a recovery, with sales per square foot at 2002 levels.

The company's reported pension expense masks true cash flow, and JCP owns substantial core and non-core fee and long-term leasehold real estate interests.

Ackman believes JCP's margins and revenues are lower than where they could be, and he thinks the company is worth "somewhere meaningfully higher than where it trades".

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Netflix is able to increase the market penetration as the market grows due to its unparalleled value offering.

The key to this growth is Netflix's ability to offer an abundance of high quality content at low costs, which beats the competition.

As the market grows, Netflix will grow even faster, thanks to its pricing power. This is because once penetration becomes high enough and the market matures, Netflix can increase its monthly subscription fee.

The demand for Netflix is price inelastic, meaning that people will continue to pay for it even as prices rise. This is evident in the way Amazon and Spotify have recently increased their prices without a significant drop in subscribers.

The fixed broadband penetration in the world is still surprisingly low at 15% as of 2019, but mobile broadband is much higher at 85%. However, for a streaming service like Netflix, which requires high transfer speeds, 4G may only just barely be enough.

Bill's team has compared Netflix to various U.S. PayTV packages and benchmarked the cost per hour of engagement between all of them, noticing Netflix beats the competition.

Netflix's market positioning is a key factor in Bill Ackman's thesis.

The company's unparalleled value offering allows it to increase market penetration as the market grows.

Bill's team has compared Netflix to various U.S. PayTV packages and found that Netflix beats the competition in terms of cost per hour of engagement.

This is because Netflix offers an abundance of high-quality content at low costs.

As the market grows, Netflix can grow even faster due to its superior offering at an unparalleled price point.

The team has also looked at the improved broadband connectivity and proliferation of connected devices that can consume OTT content.

Fixed broadband penetration in the world is still surprisingly low at 15% as of 2019, but mobile broadband is much higher at 85%.

This suggests that Netflix has a large potential market to tap into, especially as more people gain access to high-speed internet.

Netflix's pricing power is key to its growth, as it can increase its monthly subscription fee when demand is price inelastic, just like Amazon and Spotify have done recently.

Netflix has managed to improve unit economics by keeping the cost per subscriber constant, and increasing subscription prices by 7% per annum. This is a textbook example of operating leverage in action.

Because every dollar spent in content benefits every subscriber equally, the more subscribers Netflix has, the better the content acquisition cost is split among the subscribers. If Netflix had 100 customers, the content cost per customer would be only $100,000.

Netflix will generate returns through double-digit growth and share buybacks. Pershing Square's financial model has "double-digit" revenue growth built in and +20% earnings per share growth per year.

Bill's prediction on the future looks rather similar to what Wall Street is forecasting, suggesting they may not see anything the Street is not seeing.

The US political system is often criticized for its inefficiencies, and Bill Ackman's thesis highlights some of these issues.

One major problem is the lack of accountability in Congress, where members often vote along party lines rather than making decisions based on facts.

Ackman argues that the current system is designed to favor incumbents, making it difficult for new candidates to break in.

This is evident in the way politicians often use their power to maintain their seats, rather than working for the greater good.

The US electoral system is also criticized for its reliance on money and special interests, which can sway policy decisions.

Ackman notes that the current system is a "winner-takes-all" approach, where the candidate with the most votes wins the seat, regardless of the margin.

This can lead to a lack of representation for minority groups and voters who may not have a clear favorite candidate.

For another approach, see: Capital Budgeting Decisions Include

John Zolidis of Quo Vadis Capital gave an excellent pitch for Dollar Tree (DLTR) at the VALUEx conference in Switzerland, where he presented 21 slides and a six-minute presentation. You can see his slides and watch his presentation on his website.

Trading at 23.7 times this year's estimates with a market cap of over $30 billion, Dollar Tree doesn't appear cheap at first glance. But Zolidis thinks the company has room to increase prices, which will drive profits and the share price higher.

For 35 years, Dollar Tree kept prices at $1, but in 2022, the company raised prices to $1.25, immediately translating into higher sales and margins. This led to stagnant sales per square foot and profit margins before the price increase.

Zolidis' investment thesis is that the multiyear benefit to Dollar Tree from adding higher prices is just getting started and is underappreciated. He thinks the stock could jump by 50% to 80% in the next two years.

Bill Ackman of Pershing Square Capital Management announced a new fund for retail investors, Pershing Square USA, which will trade on the New York Stock Exchange. The fund will raise $10 billion, according to Ackman's post on X.

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