U.S. investment bank Citi has downgraded shares of billionaire investor Bill Ackman's investment management company Pershing Square Inc. from "Neutral/High Risk" to "Sell/High Risk," while maintaining its $45 price target unchanged. Based on the October 8 closing price of $54.44, Citi's target price implies approximately 17.3% downside for the stock.
Citi believes that since Pershing Square's listing in April this year, its share price gains have exceeded the improvement in earnings expectations, and the current valuation fully reflects the advantages of its business model, leaving limited room for further short-term upside.
Stock Price Gains Outpacing Earnings Growth, Citi Sees Valuation as Elevated
In a research report published on October 9, Citi noted that since Pershing Square's initial public offering (IPO) in April this year, market earnings forecasts for the company have remained largely unchanged, primarily due to relatively modest returns from its investment portfolio. Despite the company's continued share price appreciation, its earnings expectations have not improved in tandem, leaving the current valuation increasingly lacking sufficient performance support. Citi acknowledged that Pershing Square possesses several business model advantages, including permanent capital, relatively high recurring management fee rates, and high marginal profits from new revenue streams. Among these, permanent capital means the company can manage long-term funds that do not require periodic redemption, thereby enhancing the stability of assets under management and reducing the risk of being forced to sell assets due to concentrated investor redemptions. However, Citi believes these advantages are already fully reflected in the current share price. To further support valuation gains, the company still needs to achieve stronger investment returns or make better-than-expected progress in raising new funds.
Existing Fund Business Valued at $41 Per Share, New Fund Potential Worth an Additional $9
Citi conducted a sum-of-the-parts valuation of Pershing Square's business. The bank estimates the company's existing fund business is worth approximately $41 per share, while the potential value from future new fund launches is approximately $9 per share. The two components total about $50, but Citi's maintained price target remains at $45, reflecting its cautious stance on whether the potential value of these businesses can be fully realized in the short term. Citi believes Pershing Square needs to improve the investment performance of its funds or achieve stronger new fund fundraising results to provide support for further upside.
2027 EPS Forecast Lowered, 2028 Estimate Raised
Citi also adjusted its earnings forecasts for the next two years based on third-quarter market performance and its impact on Pershing Square's assets under management, management fees, and performance fees. Specifically: for 2027 earnings per share, the previous forecast of $1.01 was lowered to $0.89, a reduction of 11.9%; for 2028 earnings per share, the previous forecast of $0.91 was raised to $0.96, an increase of 5.5%. Citi stated that the adjustments mainly reflect changes in the timing of performance fee clawback recognition. Since a portion of an investment management company's revenue depends on fund performance, the timing of earnings recognition may be affected by portfolio returns and the relevant compensation calculation mechanisms. Therefore, changes in the timing of performance fee recognition across different years can also affect the company's annual earnings per share forecasts.
Howard Hughes' Insurance Business Transformation Could Be a Future Catalyst for Stock Price Gains
Despite the downgrade, Citi still recognizes Pershing Square's long-term strategy and financial development prospects. The bank believes the company may benefit from several potential catalysts in the future, including Howard Hughes Holdings' planned transformation into an insurance-focused enterprise. Additionally, if Pershing Square's existing investment portfolio achieves stronger returns, or if its investments in government-sponsored enterprises perform better, these could also bring additional gains to the company. However, these potential growth factors still need to be demonstrated through actual investment performance and business progress. Citi believes Pershing Square's long-term business model remains attractive, but given that the current share price already reflects high growth expectations and near-term earnings forecast improvements are limited, it is difficult to provide sufficient support for the current valuation in the short term. The core reason for Citi's downgrade is the disconnect between valuation and earnings growth: Pershing Square has a stable capital base and strong fee-generating capability, but without significant improvement in investment returns and new fund fundraising, further share price gains will require new performance catalysts.
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