Carl Icahn is a notorious activist investor, swooping into companies and demanding changes, mergers and sells. In March, he returned money to shareholders and now manages only his own money. Icahn explains his investing style this way: “The consensus thinking is generally wrong. If you go with a trend, the momentum always falls apart on you. So I buy companies that are not glamorous and usually out of favor. It is even better if the whole industry is out of favor.” According to GuruFocus Real Time Picks, Icahn recently filed 13-Ds reporting that he added Navistar International (NAV) and reduced Clorox (CLX) and Lions Gate Entertainment (LGF).
Navistar International (NAV)
Carl Icahn increased his stake in Navistar (NAV) by 1.97%, bringing his total shares owned to 7,251,426, or 9.99% of the company, according to GuruFocus Real Time Picks. Icahn previously owned 9,326 shares of Navistar in the fourth quarter of 2010 at about $52.79 per share.
Navistar is a holding company whose units produce commercial trucks, diesel engines, buses and other transportation-related equipment. The company traces its history all the way back to Cyrus McCormick, who founded it after inventing the mechanical reaper, a device that changed the world, in 1831.
Navistar derives 61.3% of its sales and revenues from its truck segment, 22.3% from its engine segment, 14% from parts and 2.3% from financial services. Its truck segment sales increased $910 million in 2010, but this was partially offset by a 14% decrease in its defense business sales. Defense revenues were lower due to fewer orders from the U.S. military compared to 2009, and other factors. Parts segment sales also fell largely due to declines in U.S. military sales.
As discussed in a previous article, the Fed has already planned $469 billion in cuts to the Pentagon’s budget. A congressional “super committee” is currently reviewing areas of the national budget to cut, and defense could further come under the knife. Navistar’s 10-K states that a growing number of its vehicles are being used by the military, but it also sells to 26 countries. It is counting on its expanded customer base, as well as product diversification and customer support for future growth.
Icahn appears to be moving into the large vehicle and defense sector, as he also disclosed in June that he owned a 9.5% stake in Oshkosh Corp. (OSK). On Nov. 1, Oshkosh lowered its earnings forecast for its defense business, expecting it to drop 15%.
Clorox Co. (CLX)
Icahn reduced his holding of Clorox Co. (CLX) by 14.12% at an average price of $65 and now owns 10,735,000 shares. Icahn originally bought 10 million shares of Clorox in the second quarter of 2011 at about $66.27 per share. News of his involvement sent the stock up to a 52-week high of $75.44.
It was an activist play for Icahn that hit a brick wall. He originally bid to take over Clorox for $76.5 per share. About a week later, he offered $80, and several weeks later he suggested a slate of his own nominees for the company’s board of directors who would either accept his proposal or take a better one from another company, if offered. Clorox rejected the proposal, saying it was “highly conditional, substantially undervalues the company and is not credible.” In later September, Clorox also withdrew his slate of nominees.
In his letter to Clorox, Icahn explained his valuation of Clorox:
This estimate is based upon our reconciliation of the high end of Clorox management's FY 2012 (ends on 6/30/12) adjusted guidance provided on 5/3/11 of $4.29 per share. $950 million unlevered pre-tax income less interest costs of $114.5 million (midpoint of Clorox management guidance) = $835.5 million of pre-tax income which tax effected at a 34% tax rate (Clorox management guidance) = $551.4 million of net income which divided by 128.5 million shares (our estimate of the shares outstanding after completion of additional share repurchases in FY 2011) equals $4.29 per share. This $4.29 per share is equivalent to the high end of Clorox management guidance FY 2012 excluding the midpoint of Clorox management guidance for one-time costs such as the investments in international IT systems and infrastructure improvements and U.S. R&D facilities.
Lions Gate Entertainment (LGF)
Icahn substantially reduced his holding of another failed activist play – Lions Gate Entertainment. After a three-year tug of war with management, Icahn agreed on Aug. 30 to sell up to 44,161,971 shares of common stock, or substantially of his holding, in exchange for dismissing all litigation and other claims the two parties had against each other. Lionsgate purchased 11,040,493 shares from Icahn at $7 per share, and had the right to purchase up to 22,080,985 more shares over the next 35 days for $7 per share. The sell price was approximately 7% below that day’s closing price of $7.55 and not much higher than the price he paid for the shares.
"We believe that this accretive and antidilutive transaction is in the best interests of all Lionsgate shareholders, and it allows the Company to continue to focus on the execution of its longterm business plan," said Lionsgate Co-Chairman and Chief Executive Officer Jon Feltheimer.
Carl Icahn responded, "As some have noted, my own 'slate' is pretty full at the time, and I therefore determined that it is a good time to exit."
On October 13, Liongate held a public offering for 19,201,000 more of Icahn’s shares at a price of $7 per shares, leaving him with approximately 3.1% of the company.
Lions Gate has had 9.3% 10-year revenue growth, though it leveled off in fiscal 2011 at $1.6 billion compared to $1.6 billion in 2010. Earnings have been negative since fiscal 2008, and free cash flow pulled up from a loss of $128 million in fiscal 2010 to $39.6 million in fiscal 2011.