Icahn Enterprises LP (IEP, Financial) is at a critical juncture. Despite facing a drastic reduction in stock price following a short seller's report from Hindenburg Research, the company boasts strong fundamentals that breed optimism. With a robust balance sheet, upgraded management teams and a focus on generating value, it has positioned itself for improvement and potential growth.
However, stagnant profitability, short interest, volatility and valuation present challenges. The discussion delves into Icahn Enterprises' core fundamentals, recent performance, technical perspective and the risks and downsides that require careful consideration.
Favorable fundamentals
Icahn Enterprises is a diversified holding company focusing on activism and consolidating operating businesses and investment funds. The recent bearish moves of the market have impacted the performance of its investment segment. However, the company has taken steps to reduce its short positions and concentrate more on activism, which has historically yielded positive results.
The company's core favorable fundamentals include a strong balance sheet with $1.9 billion in cash and $4 billion in additional liquidity. This financial strength positions Icahn Enterprises to take advantage of opportunities and potential upside in its portfolio over the coming years. The company's chairman, Carl Icahn (Trades, Portfolio), and his affiliates own approximately 84% of the outstanding units, clearly aligning their interests with those of its shareholders.
Liquidity and capital management
The focus on preserving optimal liquidity is also appealing. Icahn Enterprises' board of directors maintains a long-term view of the company's liquidity needs and evaluates strategies to improve its liquidity position. Debt and equity capital raises are undertaken when market conditions are favorable and it is believed that all unitholders will benefit. This demonstrates a responsible approach to capital management and a focus on generating value for unitholders.
Icahn Enterprises maintains ample liquidity at the holding company and its operating subsidiaries, totaling approximately $6.9 billion. This positions the company to capitalize on attractive opportunities within and outside its existing operating segments.
Looking ahead, the company aims to build asset value and maintain liquidity to take advantage of emerging opportunities. With a focus on improving performance across its operating companies, streamlining operations and managing costs, Icahn Enterprises is positioning itself for long-term growth.
Investor participation and distributions
Further, Icahn Enterprises has a history of issuing shares to the public under its at-the-market program, which enhances its liquidity position and brings in new investors, allowing them to participate in the core investment strategies. Further, the issuance of stock aligns management with public unitholders, reinforcing the commitment to common goals.
Additionally, the company has a track record of issuing quarterly distributions to its unitholders since 2005. These distributions, in combination with management’s tendency to take distributions in units, further align the interests of the management with those of its shareholders. The company's stock has traded at a premium to its net asset value since 2014, indicating investor confidence in its value proposition.
Increased disclosure and cash flows
Icahn Enterprises' complex structure, which includes non-controlling interests in some consolidated businesses, requires increased disclosure by providing segment-specific cash flows in its financial reporting, offering a clearer perspective on the cash flows at the holding company level. From 2016 to 2022, the holding company segment's net increase in cash flows amounted to $1.6 billion.
Performance analysis
For the first quarter, Icahn Enterprises recorded a net loss of $270 million. Based on these results, there appears to be room for improvement as the company continues to upgrade and augment its management teams within its operating companies.
In terms of individual business performance, the energy segment reported net sales of $2.3 billion with adjusted Ebitda of $229 million. The increase in refining margin per throughput barrel indicates positive developments, driven by widening crack spreads. However, the cost of rent continues to have a negative impact.
The atomotive segment saw an improvement in adjusted Ebitda, mainly due to the contribution of the service business and the deconsolidation of Auto Plus. Automotive service revenues also experienced growth, and efforts to simplify the supply chain and reduce costs are expected to yield further improvements in the second half of the year.
The real estate segment witnessed decreased net sales and other revenues, primarily attributed to the sale of finished lots within the development business. Leasing revenues showed an increase, but a lease termination at a commercial high-rise property may lead to a potential impairment, which will be reflected in the second quarter.
Other segments, such as manufacturing and pharma, showed relatively flat net sales. However, manufacturing efficiencies improved, leading to a 31% increase in adjusted Ebitda for the first quarter. The retail business, particularly in e-commerce, negatively impacted the home fashion segment.
Risk-reward profile
Despite its strong fundamentals, Icahn Enterprises' dividend may not be sustainable due to stagnant profitability. While it is paying a stable dividend (around $8 per share), currently resulting in a high dividend yield of 27.7%, if this trend continues, dividend payments may become unstable even with strong liquidity. Obviously, without profitability, liquidity will dry up.
The stock has considerable short interest, while recent volatility also poses a risk to its long-term value growth. In addition, with a current price of $34.09, the stock is currently trading below its GF Value Line, suggesting it may be a value trap.
Lastly, the company appears to be undervalued in comparison to industry averages based on the price-sales ratio of 0.81 and when compared to historical averages.
Takeaway
In conclusion, Icahn Enterprises' commitment to preserving liquidity aligns management's interests with those of its investors. Considering the prevailing challenges and downsides, its efforts to streamline operations, reduce costs and manage performance are expected to yield further improvements.
However, holding off may be the best stance in the current macroenvironment as investors should wait for more clear signals, like an improvement in profitability, before considering it as a potential investment opportunity.
