Carl Icahn (Trades, Portfolio) is one of my favorite guru investors because of his no-nonsense approach to investing. Icahn may be getting on, but the experience he has built over the years remains relevant, and he hasn’t lost his investment edge.
Getting things done
Unlike other gurus, Icahn knows the only way to get things done in the market is to make them happen, which is why his activist approach has been so lucrative over the years. Even today, Icahn’s approach continues to achieve results having recent successes with AIG (AIG, Financial), Xerox (XRX, Financial) and Freeport McMoRan (FCX, Financial). Despite Icahn’s reputation and his new position in the Trump administration, units of his publicly traded investment vehicle Icahn Enterprises LP (IEP, Financial) recently slumped to a near 12-month low on concerns that Icahn may have lost his edge. Is this really the case, or should investors use the slump to increase exposure to one of Wall Street’s most experienced and wealthy investors?
Evaluating Icahn Enterprises
As an income investment, Icahn Enterprises looks like a great pick. The MLP units yield around 12% today, and the firm has plenty of cash on hand to support the payout with $1.8 billion of cash on hand at the end of 2016 (excludes cash proceeds from a recent rights offering which is estimated to have raised $600 million).
There are two parts to Icahn Enterprises.
The first is the group’s equity portfolio, which was worth around $5.5 billion at the end of December. The second part is the group’s nonlisted subsidiaries, which at the end of December were valued at $5.2 billion. It’s difficult to value the nonlisted part of the portfolio but for the equity portfolio, it’s easier to calculate some ballpark figure of net asset value based on current stock prices. For example, at the end of 2016 Icahn Enterprises’ American Railcar Industries (ARII, Financial) holding was valued at $538 million, but since the end of the year, American Railcar Industries stock has dropped by 5.5% excluding dividends. CVR Energy (CVI, Financial), of which Icahn is the majority owner with a $1.8 billion holding, has seen its shares fall by around 20% this year.
The Investment Funds section of the investment portfolio has performed slightly better. Here the five top holdings, which amounted to around $8 billion at the end of 2016, were AIG, Cheniere (LNG, Financial), Paypal (PYPL, Financial), Freeport-McMoRan and Herbalife (HLF, Financial). Year to date shares in AIG are down by 8%, and Freeport has fallen 0.8%, but the rest of the holdings have gained 30% for Herbalife, 13.3% for Paypal and 12% for Cheniere. All of these figures are excluding dividends.
CVR is the only publicly traded entity that has seen its share price decline by double digits, which reinforces the case for buying Icahn Enterprises units after falling 17% year to date (once again excluding dividends).
Why the declines?
The publicly traded part of Icahn’s empire does not give any hint as to why investors have been dumping the stock in recent months, and neither do his private holdings. Icahn’s empire owns stakes in 11 different industries (he recently sold his position in Trump Entertainment (TRMYQ, Financial) to avoid conflicts of interest to join the administration) with most of group EBITDA focused on industrial industries. For 2016 the group as a whole reported revenue of $16.4 billion and adjusted EBITDA of $842 million. Of this total, 51% of EBITDA ex-investment proceeds was made in automotive businesses. The Railcar segment accounted for 27% of adjusted EBITDA ex-investment proceeds. It could be that the market is marking down Icahn Enterprises for its exposure to these two industries. Concerns about economic growth, as well as demand for railcars in a post-oil-boom world, are weighing on all industrial/railroad stocks, but is this discount warranted?
With economic growth around the world picking up, it doesn’t appear to be. Granted, these two industries have had a tough time over the past two years, but Wall Street widely expects such industrial companies to profit over the next few years thanks to improving inflation and economic growth. Icahn has set his company up with a long-term perspective, and as growth returns to these industries, the firm as a whole should see a profit revival. When combined with gains in the investment portfolio, this leads me to believe that perhaps Icahn Enterprises does offer value at current levels.
Disclosure:Ă‚ The author owns shares in Icahn Enterprises.
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