Carl Icahn (Trades, Portfolio) is a legendary investor who is known for his activist style of investing. Icahn is not afraid to make bold bets and take on management in the process. He runs a focused portfolio of approximately 17 stocks, with an estimated 13F equity portfolio value of ~$21 billion as of the end of the third quarter.
Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
In the past few quarters, Icahn's 13F reports and his Form 4 filings show that he has been loading up on Southwest Gas Holdings (SWX, Financial). Form 4 filings, which are some of the filings that show up on GuruFocus Real-Time Picks, a Premium feature, must be filed with the SEC within two days when a shareholder that owns 5% or more of a stock's total shares outstanding makes changes to the holding. In this post, I'm going to break down his Southwest trades and also the financials of this business; let’s dive in.
Icahn's Southwest trades
Icahn has been buying shares of Southwest Gas since the third quarter of 2021, when he purchased 1.269 million shares. The average price of the shares during that quarter weas $69. In the fourth quarter of 2021, he increased his position by 128%. In 2022, he continued to buy more shares in five separate transactions.
In this latest trade, Icahn purchased another 133,000 shares of Southwest Gas at an average price of $69 per share, which is a similar price to his initial purchases and is also where the stock trades at the time of writing.
Icahn now owns approximately 9.87% of all the company's shares outstanding, making him the third largest shareholder behind major institutions Vanguard and Blackrock.
What does Southwest Gas do?
Southwest Gas is a diversified energy company that owns a series of utility facilities and pipelines.
Its utility business supplies natural gas to over 2 million customers across Arizona, Nevada and California. This is a key point to know as Phoneix and Las Vegas are two of the fastest-growing cities in the U.S, according to one study by the Inspection Support Network. This means Southwest Gas is in a strong position to grow organically as more homes need a gas supply.
The company also is vertically integrated to some extent as its MountainWest business segment (which it acquired in the fourth quarter of 2021) controls the Dominion Energy (D, Financial) Questar pipeline. This gas pipeline consists of over 2,000 miles of infrastructure across Colorado, Wyoming and Utah.
Companies that own pipelines are some of my favorites because pipelines have high barriers to entry and high replacement costs. It is very difficult and expensive to construct a new pipeline and requires an extensive amount of permits. Southwest Gas was founded in 1931 and Dominion Energy (which previously owned the pipeline business) was founded in 1981. Therefore you could reason that these companies have an advantage as veteran players in the network with less “red tape” and lower costs relative to today.
Pipelines are in a similar category to railroads, one of Warren Buffett (Trades, Portfolio)’s favorite investments, as this infrastructure type also is costly to replicate by the competition. Energy transfer pipelines are also less prone to the effects of changing commodity prices, as these companies collect consistent fees for the usage of their service.
To divest or not to divest?
Southwest Gas has recently annouced plans to sell its MountainWest unit for $1.5 billion in cash to Williams Partners (WPZ, Financial).
The company also owns Centuri, a utility service company that helps utilities build and maintain their infrastructure. Recently, this business unit has been awarded a lucrative $217 million contract to build the infrastructure for an offshore wind farm. Management originally planned to spin off Centuri as an independent company in the first half of 2023. However, in the third quarter management announced it is “reviewing strategic alternatives." This change of heart could have been driven by recent contract wins, as companies rarely like to sell off a business that is performing well. In December, though, management has U-turned again and announced it will be spinning off the unit, according to a recent press release.
Stable financials
Southwest Gas reported strong financial results for the third quarter of 2022. Revenue was $1.13 billion, which increased by a substantial 46% year over year and beat analyst estimates by $59.63 million.
This strong growth was driven by 40,000 new natural gas customers, which I suspect is due to the aforementioned growth in major cities such as Phoenix and Las Vegas.
The price of natural gas also remains significantly elevated at $6 per million British Thermal Units, which is well above pre-pandemic levels of $1.90 per million British Thermal Units. This is despite a correction from the $9 per million British Thermal Units high in August 2022. Therefore I imagine Southwest Gas will be benefiting substantially from these elevated gas prices, as demand is strong globally.
Its Centuri service business also reported solid revenue growth of $750 million, which increased by 20% year over year. This was driven primarily by the acquisition of the utility construction provider Riggs Distler. Excluding this acquisition, this business segment increased its revenue by 6% year over year. This acquisition is expected to enable further growth into offshore wind projects. The aforementioned contract win is a testament to this.
Despite the positive tailwinds, the company reported a loss per share of $0.08, which missed analyst estimates by $0.44. This was partially driven by business seasonality and acquisition-related costs.
A positive is its MountainWest business segment delivered $12.3 million in net income, despite a one-off expense related to the acquisition. Management has highlighted the “consistent” cash flow generation and “superior” customer service as key value points of the MountainWest business.
Southwest Gas has a strong balance sheet with $175.3 million in cash and cash equivalents. The company does have high debt of $5.9 billion, but just $41 million of this is “current debt” due within the next two years. The company also offers a 3.8% dividend yield, which has been growing over the past few years.
Valuation
Southwest Gas trades at a price-sales ratio of 1, which is 57% cheaper than its five-year average.
The GF Value chart indicates a fair value of $85 per share, which means the stock is “modestly undervalued” at the time of writing.
Final thoughts
Southwest Gas is a fantastic company that is diversified across many parts of the energy sector from the utility side to pipelines and even services. I like the company even better now that Icahn has become involved. Perhaps he has even had a hand in its recent developments. Given the tailwinds around energy security and Southwest's strong business strategy, I believe the company has a lot going for it.
