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Finding Value With Icahn
Icahn Enterprises (NYSE:IEP) is a master limited partnership, yielding 4.42%, which owns subsidiaries engaged in multiple businesses including real estate, food packaging and investment management. Investment guru Carl Icahn, chairman of the board for the holding company, remains the largest shareholder of Icahn Enterprises. Its strategy involves identifying and purchasing undervalued assets, which are often either distressed or emerging from bankruptcy.
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Ample Cash
Although the stock failed to show strong performance following the post-recession rally, there is a strong indication that Icahn Enterprises is in a position to outperform its competitors such as Legg Mason (NYSE:LM), Jones Lang (NYSE:JLL) and Reinsurance Group of America (NYSE:RGA). On a year-over-year basis, revenue soared by 62% while net income bounced from a loss of $65 million to $240 million. Most impressively, the limited partnership holds approximately $31.50 of cash for every outstanding share. Although IEP carries a heavy debt burden of $7.11 billion, at a price of $45, the stock has some room to appreciate in value. In 2007, for example, when the shares were trading at $125, cash and short-term investments exceeded long-term debt by $597 million; currently cash and investments exceed debt by $5.2 billion.
A substantial portion of the debt, for which Icahn Enterprises Holdings serves as the guarantor, are 7.75% and 8% senior unsecured notes with maturities in 2016 and 2018, respectively. Icahn Enterprises operations can sustain such a debt burden as its interest coverage ratio stands at 3.04. This metric compares favorably to Jones Lang, which under its debt covenants must maintain a cash interest coverage ratio above 2.25.
Improved Operations
In terms of operations, all segments either showed sales improvements over the last year or at least remained flat. Investment management showed the most impressive growth as quarterly revenue grew from $54 million to $647 million, while food packaging and real estate were the two segments that failed to record growth.
Significant Insider Interest
Management cites that a potential risk for Icahn Enterprises is that Carl Icahn and his affiliates own 100% of the company, thus rendering a great deal of influence on the operations. The investment process of the holding company, therefore, often replicates that of Mr. Icahn's. However, this should not pose a threat to the MLP. With a net worth of $12.5 billion, Carl Icahn has proved himself to be a brilliant private equity investor and hedge fund manager, spotting growing value plays like Biogen (Nasdaq:BIIB) and Mattel (Nasdaq:MAT). Unlike corporations where management compensation goes unchecked, Daniel Ninvaggi, the new CEO of Icahn Enterprises, receives most of his pay through out of the money call options, thus providing incentive to provide maximum returns to shareholders. Additionally, Carl Icahn took a significant pay cut from $900,000 to $400,000 in 2009, when IEP's share price plummeted during the credit crisis. (Buying up failing investments and turning them around helped to create the " Icahn lift" phenomenon. See Carl Icahn's Investing Strategy.)
The Bottom Line
As Icahn continues to bid for Clorox (NYSE:CLX), rumors have emerged that the bleach maker might be integrated with Icahn Enterprises as a means to pull out regular cash flows from the firm. Or, perhaps the intent is to purchase the consumer goods maker and sell it off to a larger corporation such as Proctor and Gamble (NYSE:PG) or Unilever (NYSE:UL). Either way, the holding company appears to have a stable financial situation and with much future upside potential.
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Ample Cash
Although the stock failed to show strong performance following the post-recession rally, there is a strong indication that Icahn Enterprises is in a position to outperform its competitors such as Legg Mason (NYSE:LM), Jones Lang (NYSE:JLL) and Reinsurance Group of America (NYSE:RGA). On a year-over-year basis, revenue soared by 62% while net income bounced from a loss of $65 million to $240 million. Most impressively, the limited partnership holds approximately $31.50 of cash for every outstanding share. Although IEP carries a heavy debt burden of $7.11 billion, at a price of $45, the stock has some room to appreciate in value. In 2007, for example, when the shares were trading at $125, cash and short-term investments exceeded long-term debt by $597 million; currently cash and investments exceed debt by $5.2 billion.
A substantial portion of the debt, for which Icahn Enterprises Holdings serves as the guarantor, are 7.75% and 8% senior unsecured notes with maturities in 2016 and 2018, respectively. Icahn Enterprises operations can sustain such a debt burden as its interest coverage ratio stands at 3.04. This metric compares favorably to Jones Lang, which under its debt covenants must maintain a cash interest coverage ratio above 2.25.
Improved Operations
In terms of operations, all segments either showed sales improvements over the last year or at least remained flat. Investment management showed the most impressive growth as quarterly revenue grew from $54 million to $647 million, while food packaging and real estate were the two segments that failed to record growth.
Management cites that a potential risk for Icahn Enterprises is that Carl Icahn and his affiliates own 100% of the company, thus rendering a great deal of influence on the operations. The investment process of the holding company, therefore, often replicates that of Mr. Icahn's. However, this should not pose a threat to the MLP. With a net worth of $12.5 billion, Carl Icahn has proved himself to be a brilliant private equity investor and hedge fund manager, spotting growing value plays like Biogen (Nasdaq:BIIB) and Mattel (Nasdaq:MAT). Unlike corporations where management compensation goes unchecked, Daniel Ninvaggi, the new CEO of Icahn Enterprises, receives most of his pay through out of the money call options, thus providing incentive to provide maximum returns to shareholders. Additionally, Carl Icahn took a significant pay cut from $900,000 to $400,000 in 2009, when IEP's share price plummeted during the credit crisis. (Buying up failing investments and turning them around helped to create the " Icahn lift" phenomenon. See Carl Icahn's Investing Strategy.)
The Bottom Line
As Icahn continues to bid for Clorox (NYSE:CLX), rumors have emerged that the bleach maker might be integrated with Icahn Enterprises as a means to pull out regular cash flows from the firm. Or, perhaps the intent is to purchase the consumer goods maker and sell it off to a larger corporation such as Proctor and Gamble (NYSE:PG) or Unilever (NYSE:UL). Either way, the holding company appears to have a stable financial situation and with much future upside potential.
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by
Arthur Pinkasovitch
Arthur Pinkasovitch is an Analyst at Investopedia and is currently a CFA level 3 candidate. His investment focus is centered on energy and commodities as well as applying basic economics principles to everyday investment analysis. Arthur teaches introductory corporate finance at a local college and is part-owner of a Russian Grocery Store. You can follow Arthur on Twitter.
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