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Why This Hedge Fund Manager Likes Fast Food

Thursday, 8 Mar 2012 | 12:03 PM ET
Josephine Hernandez hands a tray of drinks to a drive thru customer at a McDonald's restaurant in Redwood City, California.
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Josephine Hernandez hands a tray of drinks to a drive thru customer at a McDonald's restaurant in Redwood City, California.

Why would a multibillion-dollar hedge fund manager buy fast food? For major profits.

“We’ve been a big investor in the space,” Bill Ackman, founder and CEO of Pershing Square said of fast-food chains on Thursday.

Ackman’s investment in McDonald’s in 2005 almost doubled by the time he sold it for $56 a share.

Bill Ackman: Investment Strategy & Economic Outlook
Insight on his investment in the fast food business, with William A. Ackman, Pershing Square Capital Management, who says he is no longer invested in McDonald's, but has respect for what the company has done. Ackman also discusses his previous investment in Borders, Amazon's dominance in the e-book market, and says Warren Buffett's advice on buying homes presents an opportunity.

"We owned McDonald’s for a long period of time, and have tremendous respect for what they've accomplished," he told CNBC.

Pershing Square also invested in Wendy’s in 2005, which Ackman says paid off after ”convinc[ing] them to spin off Tim Horton’sCanadian coffee and donut chain.”


While he does not currently own McDonald's shares, Ackman commends the company for exploiting the value of its real estate and franchise network.

“I like a businesses when you charge a royalty on other people’s sales. Their business is collecting 4 percent of the gross revenues of 33,000 boxes around the world, and another 8 or 9 percent in rent,” he said.

This means McDonald's rakes in about 13 or 14 percent of stores’ gross revenues.

"Every time they sell a Coke, McDonald's makes 14 cents. It’s better than Coca-Cola," he added.

That said, the Street was disappointed on Thursday when McDonald’s reported a smaller-than-expected rise in February sales at established restaurants across the globe.

As Ackerman was speaking, analyst Matthew DiFrisco from Lazard capital watched McDonald’s shares fall more than 2 percent. But, in a separate interview, DiFrisco said he's holding on to his $108 price target.

“Weather impacted global sales in the first quarter, but they are doing well in the U.S., and taking a ton of market share,” he said. “They also have a very attractive 3 percent dividend yield right now.”


Additional News: McDonald’s Sales Miss on Weak Europe, Asia
Additional Views: McDonald’s Is a Dividend-Paying Buy: Analyst

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Disclosures:

Bill Ackman does not personally own MCD, and Pershing Square does not have a position in the stock. Matthew DiFrisco does not personally own the stock, but Lazard Capital makes a market (matches buyers and sellers) in MCD securities.

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