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![The New York Times 2015 DealBook Conference](https://static.seekingalpha.com/cdn/s3/uploads/getty_images/495511756/image_495511756.jpg?io=getty-c-w750)
Neilson Barnard
Article Thesis
Icahn Enterprises L.P. (NASDAQ:IEP) inventory stays beneath strain following the Hindenburg brief report. Shares have now pulled again 60% from the extent shares have been at over the past couple of months. Invoice Ackman from Pershing Sq. Holdings (OTCPK:PSHZF) has added to the promoting strain seen in IEP through feedback he made this week. IEP’s dividend yield has soared to a particularly excessive degree – however the dividend continues to be not lined by earnings, which is why earnings traders shouldn’t blindly rush into this inventory.
What Occurred?
Icahn Enterprises L.P. is the principle funding automobile for Carl Icahn, one among Wall Road’s most well-known traders. Icahn Enterprises has been buying and selling approach forward of the corporate’s reported internet asset worth for an extended time period. This may be defined by the truth that exterior (or retail) traders primarily purchased IEP attributable to its excessive dividend yield, whereas they did not care an excessive amount of concerning the firm’s internet asset worth per share. Carl Icahn is the principle investor in IEP, holding the overwhelming majority of shares. Since he has been receiving dividends within the type of new shares, the excessive dividend payout could possibly be maintained, because the overwhelming majority of dividend funds didn’t require any money outflow. Then again, the truth that Carl Icahn obtained, like some retail traders, dividends within the type of new shares, prompted a gentle improve within the firm’s share depend. This, in flip, has resulted in additional internet asset worth per share strain attributable to dilution. Nonetheless, IEP’s share worth has been fairly steady for fairly a while – till Hindenburg got here out with a brief report that obtained a number of consideration:
![Chart](https://static.seekingalpha.com/uploads/2023/5/25/saupload_c22f1a50c78882c568b1526879b07994.png)
It is outstanding to see how steady IEP has been as much as a few weeks in the past – shares seemingly all the time traded round $50 to $60, it doesn’t matter what the broad market’s efficiency seemed like. It is also fairly simple to see when Hindenburg’s brief report dropped – IEP abruptly fell off a cliff. Shares are down round 60% from current ranges, and so they’re down round 20% this present day alone. This has made the dividend yield soar to an extremely excessive degree of 41% – however watch out, this alone shouldn’t be a purpose to purchase.
The steep drop seen over the past two days was largely fueled by feedback made by Invoice Ackman, one other Wall Road titan. Invoice Ackman and Carl Icahn had a little bit of a duel about Herbalife Ltd. (HLF) round a decade in the past, which could clarify why Invoice Ackman commented on IEP’s steep share worth decline. You’ll be able to learn extra about Ackman’s feedback here on Searching for Alpha, however listed below are some excerpts:
“Its efficiency historical past and governance construction don’t justify a premium; somewhat they recommend that a big low cost to NAV could be acceptable.”
“All it takes is for one lender to interrupt ranks and liquidate shares or try to hedge, earlier than the home comes falling down.”
Are these feedback justified? Let’s take a better look. Over greater than twenty years, Icahn Enterprises has considerably outperformed the broad market:
![Chart](https://static.seekingalpha.com/uploads/2023/5/25/saupload_1adeb3a54e38e5e9d129b764acb9cb1a.png)
This even holds true after we account for the hefty share worth drop over the past couple of weeks. Traditionally, IEP shareholders have thus achieved higher than those who purchased the broad market, which is kind of a feat. I thus consider that Ackman’s remark about IEP’s efficiency historical past being questionable shouldn’t be very reasonable – IEP’s efficiency historical past is nice, no less than for those who purchased early on. Ackman’s remark that IEP ought to commerce at an enormous low cost to internet asset worth attributable to its efficiency historical past is thus one thing I do not agree with – attributable to an above-average efficiency, one might argue {that a} premium to internet asset worth is justified. That does, in fact, not imply that the web asset worth premium needs to be as excessive because it was previous to the current share worth crash.
Then again, Ackman’s remark concerning the governance construction is right – LP traders do not have a number of energy when shopping for IEP. Resulting from the truth that IEP is essentially owned by Carl Icahn himself, his pursuits are aligned with these of retail traders, nonetheless, which is why the little energy of out of doors traders in IEP shouldn’t be essentially an issue. That will be a approach bigger drawback if Icahn’s pursuits and people of minority holders weren’t aligned. However since Carl Icahn himself advantages from a powerful complete return from IEP simply the best way minority traders do, the governance construction shouldn’t be an excessive amount of of a problem, I consider.
Invoice Ackman additionally talked about potential points with lenders, a problem that was introduced up by Hindenburg as properly. If Hindenburg and Invoice Ackman are right, Carl Icahn’s private loans are a danger. They hinted at a possible danger from margin calls if the collateral for these loans – Carl Icahn’s stake in IEP – declines an excessive amount of. Then, presumably, a margin name might pressure Carl Icahn to promote, and many others. We do not find out about this example for certain, however Carl Icahn has made statements that point out that his private loans usually are not a danger for IEP and its shareholders. Searching for Alpha reported: “Icahn Enterprises stated within the response on Wednesday that Icahn has suggested that he and his associates are present and in full compliance with all private loans.” Whereas Icahn’s private loans thus may grow to be a danger finally, it doesn’t seem like they’re a significant danger proper now – no less than that is how I interpret Carl Icahn’s assertion.
IEP’s Underlying Efficiency
Icahn Enterprises L.P. issued its first-quarter earnings report shortly following Hindenburg Analysis’s report. The headline numbers might be seen right here:
![IEP results](https://static.seekingalpha.com/uploads/2023/5/25/28873105-16850446570720365.png)
Searching for Alpha
This does not look nice at first sight, in fact, as IEP logged a significant internet loss. Then once more, it is a GAAP consequence, and attributable to many transferring components and the sophisticated construction of IEP and its totally different holdings, internet revenue shouldn’t be essentially telling rather a lot about IEP’s underlying efficiency.
Among the highlights within the earnings slides embody the next:
![IEP](https://static.seekingalpha.com/uploads/2023/5/25/28873105-16850448154209647.png)
IEP presentation
EBITDA was constructive, which is nice, though significantly decrease in comparison with one 12 months earlier. The cyclical nature of among the companies IEP invests in, corresponding to vitality, refining, and many others. explains among the transfer in EBITDA seen over the past 12 months. Once we get extra into the small print, we see that EBITDA at IEP’s working companies has gone up properly, from $160 million in Q1 of 2022 to $270 million in Q1 of 2023. Sadly, this was greater than offset by weaker EBITDA from IEP’s funding enterprise. For the reason that efficiency of the funding enterprise is extra depending on broad market actions, one might argue that the EBITDA decline on this section is not very telling concerning the long-term outlook, however the truth stays that EBITDA did decline over the past 12 months.
Web asset worth was flat, which looks as if an inexpensive consequence, though it isn’t nice after we take into account that IEP’s share depend has elevated over the past 12 months – internet asset worth per share has thus gone down to a point.
The dividend has been maintained on the degree seen over the past couple of years, which made some bulls very comfortable. That being stated, the truth that Carl Icahn receives dividends within the type of new shares implies that IEP’s share depend has continued to climb, which might additional strain the corporate’s internet asset worth per share, all else equal. General, IEP’s outcomes for the primary quarter didn’t appear nice, however not disastrous, both.
IEP: Dividend And Valuation
IEP doesn’t earn the $2 per share per quarter that it pays out. It by no means has. And but, the corporate continues to make this fee. So long as most dividends aren’t paid out within the type of money, however within the type of new shares, the corporate is theoretically capable of preserve the dividend on the present degree. However with a lot of new shares being issued each quarter, dilution can be huge going ahead – which is able to trigger internet asset worth per share to drop decrease and decrease. It is exhausting to say whether or not Carl Icahn believes that that is good for him and different shareholders in the long term. A dividend lower might thus undoubtedly occur, and even when there may be none, traders ought to know that the web asset worth of their shares will drop significantly.
As we speak, IEP has a internet asset worth per share of roughly $15. That is nonetheless beneath the present share worth, however the premium to NAV shouldn’t be very massive proper right here, at round 30%. In comparison with the 200%-plus premium seen not too way back, that is very affordable. One can argue whether or not a premium to NAV is justified, however based mostly on the truth that IEP has traditionally outperformed the broad market, I consider that this might certainly be the case.
Last Ideas
I’ve no place in IEP. NAV efficiency has been uneven up to now, and when the dividend is maintained, traders should settle for huge dilution in flip for an extremely excessive 40%-plus dividend yield. Whether or not that works out properly in the long term shouldn’t be identified in the present day – however no less than up to now, long-term traders holding onto IEP have achieved properly. I give IEP a impartial score and can keep on the sidelines for now.
Editor’s Notice: This text discusses a number of securities that don’t commerce on a significant U.S. change. Please concentrate on the dangers related to these shares.
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