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Few public investing figures attract more attention (some would say lightning) than Carl Icahn. The man has been around a long time and has amassed considerable wealth by scooping up distressed assets, turning them around, and selling them for a big profit. Carl Icahn is one of the few names that, when it is revealed he holds a stake in a public company, the stock price of that company often leaps significantly. Moreover, the power of his name is such that he could take a position in a company, announce it, see the stock rise and exit the position if he wanted to.
Icahn Enterprises L.P. (IEP) allows investors to take an ownership position in a part of Icahn’s operation. You won’t have any say in how the partnership operates since Icahn owns 89% of the shares. That’s the price you pay if you want Icahn to steer the ship. Yet given the 1,000%+ return that IEP has delivered over the past decade, I wouldn’t argue with that, either. The stock has vastly outperformed rivals like Berkshire Hathaway (BRK).
Carl Icahn has been in the news more recently for several reasons. He, and his management, have such a great track record that drawing down debt for acquisitions is easier for them than anyone else. Low interest rates allow them to take activist stakes in companies they believe are undervalued. They don’t’ just buy undervalued companies and wait for the market to deliver their reward, they push for management changes themselves to hasten the process. This has earned Icahn a reputation for being aggressive, nasty, and arrogant. Then again, his results speak for themselves.
As of the end of February, the company held large positions in many well-known companies: Apple Inc. (AAPL), Forest Laboratories (FRX), eBay Inc. (EBAY), Chesapeake Energy (CHK), Herbalife (HLF), Netflix (NFLX), Transocean. (RIG), Nuance Communications (NUAN), Talisman Energy (TLM), Hologic (HOLX) and Navistar International (NAV).
That’s just a few of the company’s holdings. There are many others, and it results in a diversified set of entities for Carl Icahn. Most are shares in liquid companies, allowing Icahn to buy and sell without moving the market too much and allowing him to obtain liquidity for other purchases should they arise.
Carl Icahn’s strategy has resulted in substantial adjusted EBITDA for shareholders. $1.54 billion was generated in FY11 and FY12, and $1.896 billion last year. The company holds $3.2 billion in cash, offset by $9.2 billion in low-cost debt.
It’s difficult to value the company on a traditional PEG ratio basis. Earnings can fluctuate wildly depending on factors involving the many holdings, and the capital gains generated from stock sales. If one takes a 6.1% future FCF growth rate an 15% discount rate, you get fair value of $135. Setting aside hard quantitative valuations however, is something I do when faced with companies like these. For me, the question is whether I like the stocks he takes positions in and see the value proposition, see a continuous trend of appreciation in those stocks, and see continuous free cash flow. Add in the 5.9% yield and I still see IEP as a buy.
Lawrence Meyers owns shares of Apple and IEP.
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