Could Buying This $4.1 Billion Stock Be Like Buying Berkshire Hathaway in 1965?

Bill Ackman's Pershing Square is acquiring a significant stake in Howard Hughes Holdings (HHH), a real estate company specializing in master-planned communities, with Ackman becoming executive chairman. Ackman aims to transform Howard Hughes into a diversified holding company akin to Berkshire Hathaway, potentially by acquiring or building an insurance business to access investable capital via float. While Howard Hughes' net asset value is estimated at $5.85 billion against a $4.1 billion market value, the significant fees Pershing Square will collect for managing the investment portfolio raise questions about Ackman's ability to replicate Buffett's success, though the stock may offer good value at its current price.

Analysis

Bill Ackman's Pershing Square is significantly increasing its stake in Howard Hughes Holdings (HHH) to 46.9%, with Ackman becoming executive chairman, signaling a strategic pivot for the real estate company. Pershing Square's $900 million investment, priced at $100 per share, represents a premium to HHH's current market price but a discount to its management-estimated net asset value of $5.85 billion, which contrasts with its pre-deal market capitalization of $4.1 billion. Ackman's stated goal is to transform HHH, which specializes in master-planned communities and has navigated rising land prices against pressures from commercial office valuations and interest rates, into a diversified holding company akin to Berkshire Hathaway. A cornerstone of this strategy involves establishing an insurance business to access investable capital through float, a model central to Berkshire's success. While Ackman is a highly regarded investor, the proposed structure includes substantial ongoing fees for Pershing Square—$3.75 million quarterly plus 0.375% of market capitalization growth exceeding inflation—a departure from Warren Buffett's approach at Berkshire. The market sentiment for HHH is positive (ticker sentiment score 0.6), reflecting optimism about this M&A and management-led restructuring. However, the increased market competition compared to Buffett's early days presents a considerable challenge to replicating Berkshire’s historical returns, despite the potential value in HHH shares indicated by Ackman's investment terms.

Key Decisions for Investors

• Investors could consider Howard Hughes Holdings (HHH) as an opportunity to align with a prominent investor, Bill Ackman, in an entity potentially trading below its intrinsic asset value, further supported by Ackman's premium purchase price.
• Careful monitoring of Ackman's execution in transforming HHH into a diversified holding company, particularly the successful establishment and performance of an insurance operation and the effective deployment of capital, is warranted.
• Prospective and current shareholders should factor in the impact of Pershing Square's significant management fees and the heightened competitive landscape on long-term return potential when assessing HHH's risk-reward profile.