PSHZF - Icahn Enterprises: Stay Out Of The Hindenburg Fight

2023-05-12 15:49:51 ET

Summary

• Icahn Enterprises investors endured another roller-coaster week as the MLP reported its first quarter earnings recently.
• Unitholders who bought the recent dips likely saw the opportunity of a lifetime as IEP's price action fell toward lows last seen in 2010.
• However, Hindenburg's short report raised valid questions that investors must carefully assess. We highlight the crucial ones in the article.
• While IEP might seem highly attractive for investors willing to buy the plunge, we find it challenging to be aggressive here.

Unitholders in Icahn Enterprises L.P. ( IEP ) endured mayhem over the past few weeks since Hindenburg Research launched its short report on the MLP.

As such, it sent IEP's price action toward lows last seen in May 2020 as dip buyers attempted to defend the selloff. Carl Icahn shot back at Hindenburg, stressing that founder Nathan Anderson and his team are " engaging in destructive tactics and disinformation campaigns," hurting "companies and individual investors."

As such, we believe some holders could have used the recent selloff as a "fantastic" dip-buying opportunity to add more positions, with its dividend yield surging above 25%.

However, investors need to assess carefully whether Hindenburg's report makes sense, coupled with arch-rival Pershing Square's ( PSHZF ) Bill Ackman's now-famous " karmic quality " comment, "urging readers to consider it a must-read."

Investors without accounting or corporate finance school training could find the report hard to digest. However, Hindenburg made it clear that unitholders drawn to its very high dividend yields need to consider the following critical factors:

Source: Hindenburg Research, IEP's FQ1'23 earnings release, S&P Cap IQ

Icahn Enterprises' recent earnings release showed that it was hurt by its short exposure further , leading to a net loss of $375M for its investment segment. As such, it reported a net loss in investment activities of $443M, impacting its net revenue for the quarter, as it fell to $2.64B, down 35% YoY.

Despite that, IEP still reported an operating cash flow of $247M while maintaining strong liquidity of nearly $6B (including $1.9B in cash and equivalents).

Therefore, dividend investors willing to bet on IEP's recent 25% dividend yield were likely not worried about its ability to fund its cash dividend payouts since Carl Icahn receives his allocation in units.

However, as detailed in the table above, some of the segments highlighted by Hindenburg accounted for nearly 20% of its gross indicative asset value. What's interesting is management didn't revise their indicative valuation marks downward compared to FQ4, despite the recent market upheavals.

Considering the banking crisis, the commercial real estate market has come under further stress in FQ1. Moreover, recent commentary suggests that commercial real estate values could fall further, indicating investors should discount the multiples used in their assessment.

Furthermore, we gleaned that the median EBITDA multiple in automotive services is likely closer to the 9.3x zone (according to S&P Cap IQ data), way below the 14x multiple used by IEP in its valuation assessment.

Hindenburg highlighted in its report the troubles faced by Icahn Enterprises' automotive segment, which reported "$88 million and $119 million in operating cash flow in 2022 and 2021, respectively."

We also gleaned that its auto segment posted a net loss of $13M in FQ1'23, compared to last year's $28M loss. Moreover, the auto segment's net revenue fell to $457M from $565M last year. Hence, it does raise some red flags on whether IEP has been too aggressive with its valuation multiples, lifting its indicative gross asset value.

With holding company debt of $5.31B, IEP likely knows that significant markdowns in its indicative gross asset value could send shivers down the spine of its holders.

We believe it could explain why buyers have not reacted well to the report, despite the MLP's assurance of defending its unitholders. Investors are likely expecting more troubles ahead.

With that in mind, should brave investors plunge in now, anticipating the worst selloff in IEP could be over?

Based on Seeking Alpha Quant, IEP is given an "A+" grade for valuation (the best possible).

However, red flags on its profitability need to be carefully assessed. Hindenburg raised valid questions on the MLP's ability to sustain its dividends with segment valuation metrics that could be too aggressive.

For us, we assessed that the operations and valuation assessment of IEP's business segments and its investment fund had raised many red flags and questions that we don't have a clear answer to.

Hence, despite its highly attractive dividend yield and potential peak pessimism, driven by the selloff, we don't find that its fundamentals are aligned with our investment strategy.

The steep Icahn premium is hard to explain. But, perhaps, as Hindenburg articulated: "Carl Icahn has built an aura of invincibility around himself - a titan of Wall Street with a knack for coming out on top."

However, the research firm reminded holders, "Confidence games never last forever - we expect Icahn Enterprises will be no different."

Sometimes, staying on the sidelines could be a better option, despite the appeal.

Rating: Hold.

Important note: Investors are reminded to do their own due diligence and not rely on the information provided as financial advice. The rating is also not intended to time a specific entry/exit at the point of writing, unless otherwise specified.

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