Carl Icahn (Trades, Portfolio)’s Icahn Enterprises LP (IEP, Financial) reported its first-quarter 2017 financial results at the beginning of this week. The results show that despite Icahn’s reputation and position in Donald Trump’s administration, trading continues to be tough with a loss of $18 million reported for the period on revenues of $4.7 billion. Still, these figures are much improved year-on-year. For the comparable period last year, revenues were $3.1 billion and the net loss attributable to unitholders was $837 million.
These results, while important, are not really indicative of the entire Icahn group’s trading performance. The most important part of the company’s business portfolio is its investment holdings and the performance of these holdings. Unfortunately, after a rough 2016, the portfolio of publicly traded businesses started 2017 on the back foot as well.
Poor trading performance
In 2016, the value of the fund fell 20.3%. In the first quarter, the value of the investment fund dropped 2.7%. This lackluster performance has dented Icahn’s long-term record.
Just two years ago, before the performance of the funds began to deteriorate, the annualized return of the company’s investment funds was 13%. Today that return has dropped to 6.2%.
But it is not all bad news as some positions have performed better than others. American International Group Inc. (AIG, Financial), Icahn's biggest holding, appears to be to blame for most of the declines. Shares in the company dropped by just over 6% during the first quarter. Other positions such as Cheniere Energy (LNG, Financial) and PayPal (PYPL, Financial) have produced gains for the fund.
Has this changed the investment thesis? Not in the long term. The company’s overall net asset value is heading in the right direction, increasing from $5.6 billion at the end of 2016 to $5.8 billion at the end of the first quarter. Meanwhile, adjusted EBITDA attributable to Icahn Enterprises moved from -$70 million for the final quarter of 2016 to $412 million for the first quarter of 2017. Adjusted EBIT went from -$249 million to $217 million. So the figures are heading in the right direction. The performance of the equity portfolio is the big sticking point, however. The question that needs to be asked is, has Icahn lost his edge?
Is Icahn old news?
Despite deteriorating returns, I do not think this is the case. Looking over the long term, Icahn has a record of achieving outstanding returns and, as he would likely tell you, there are bad years in the markets. 2016 was one of those.
And even though the investment portfolio suffered during the first quarter, there are signs things are turning around.
Specifically, in the past month, all major positions have risen with Herbalife (HLF, Financial) leading the charge, rising 15%. PayPal has gained 4.3%, and Cheniere is up 4%. AIG has gained 1%. Hertz (HTZ, Financial), down 42% year to date, is the one black spot in the portfolio. But compared to the rest of the holdings, this performance is not overly significant.
Icahn Enterprises is an investment vehicle with some operating businesses attached, but the market is mainly focused on the investment side of the company. So like all investment businesses, there are both good and bad times based on the market environment. Icahn was not the only investment manager to suffer last year. This year, it looks as if his performance is coming back. As with all investment vehicles, you cannot expect outperformance year after year. Icahn may have had a few bad years, but it is not worth giving up on the company just yet because even Warren Buffett (Trades, Portfolio) has bad years. If Icahn is still struggling in two years, it may be time to walk away. As of right now, patience is a virtue.
Disclosure: The author owns shares of Icahn Enterprises.
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