2023-05-09 04:51:17 ET
Summary
- Icahn Enterprises recently became the target of a short seller attack, resulting in a massive decline in the company's valuation.
- However, the holding company just announced a new $2.00 per-unit dividend, resulting in a huge rebound in the unit price on Friday.
- IEP has $5 per-unit in cash on a holding level and about $14.50 per-unit including operating cash.
- Units now look attractive and may have continual rebound potential.
Icahn Enterprises L.P. ( IEP ) has become the target of a famous short seller lately, Hindenburg Research, which has resulted in a massive decline in the holding company’s unit price last week. The dividend yield of IEP currently sits at 21% and while the short seller attack has been successful initially, there are also good reasons to consider buying units of IEP on the drop. Icahn Enterprises’ valuation is now much more attractive than last week, with units selling for a much lower NAV multiplier. Icahn Enterprises also struck back against the short seller attack on Thursday and announced a new $2.00 per-unit distribution which resulted in a 26.7% unit price rally on Friday and I believe the announcement will continue to attract dividend investors back into IEP stock!
Icahn Enterprises and short seller allegations
Icahn Enterprises L.P. is a holding company with a small number of core segments including Investment, Energy, Automotive and Real Estate. At the end of FY 2022, Icahn Enterprises and its included subsidiaries owned assets worth $19.8B which produced total adjusted EBITDA of $758M.
On May 2, 2023 Hindenburg Research published a lengthy list of allegations against Carl Icahn’s investment company which chiefly included concerns over the unit’s high premium to net asset value. As a result of the short seller report, units of IEP crashed last week and dropped from $50 before May 2, 2023 to $28 on May 4, 2023 before rebounding to $38 on Friday.
Just two days after the short seller report was published, Icahn Enterprises did something smart: the investment company issued a statement last Thursday in which a new distribution in the amount of $2.00 per-unit was declared for the first-quarter. Based off of a $2.00 per-unit distribution, units of IEP yield approximately 21% right now. The announcement led to a huge rebound in the unit price of Icahn Enterprises as well: IEP ended the day with a gain of 26.70%, reversing some of the losses that occurred on the previous two days.
Q1'23 earnings expectations
Icahn Enterprises is slated to report earnings on Wednesday and expected to post revenues of $2.86B and EPS of $0.19 per-unit. I would not expect too much from Icahn Enterprises' Q1'23 earnings scorecard as the company's large concentration in cyclical businesses likely resulted in weak financial performance in the first-quarter. I believe the earnings report itself will not have much of an impact on the pricing of IEP's units. However, any additional disclosures IEP makes that counter Hindenburg Research's allegations would likely be seen by investors as supportive of the bull thesis.
IEP trades at an "Icahn" premium
It is true that units of IEP traded at a significant premium to net asset value before the short seller report was published... and they still do, but this is due to the “Icahn” factor. Carl Icahn has developed a reputation for himself as a successful corporate raider with an estimated net worth of approximately $14B . Icahn Enterprises currently trades at a P/B ratio of 3.46X which is, admittedly, high, but investors tend to be willing to pay a premium for the privilege of investing alongside one of the most successful investor in the world. Before the report, IEP traded at 4.8X book value...
High cash value per-unit
Icahn Enterprises had $1.72B in cash on its balance sheet (on a holding level) at the end of Q4’22 and a total net asset value of $5.6B, showing an increase of 10% year over year. With 337.5M outstanding units, IEP has about $5 per-unit in cash and a total cash position (including operating and restricted cash) of $14.50 per-unit. The last cash per-unit figure, $14.50, represents approximately 38% of Icahn Enterprises' market cap.
Low short interest ratio before short seller report
Icahn Enterprises has not been a heavily shorted stock before the Hindenburg Research report was released to the public last week. The short interest ratio for Icahn Enterprises based on the last available information was well below 1%, meaning the market in general didn’t see much short potential in IEP. Hindenburg’s report may have changed this in May (and new short sale data will reveal to what extent), but overall interest in shorting Icahn Enterprises has been very low until last week.
Risks with Icahn Enterprises
The big risk for Icahn Enterprises, as I see it, is not the valuation of the holding company’s units, but the cyclical nature of the underlying investments which make up the holding company's portfolio. Investments, Energy, Automotive and Real Estate are all fundamentally cyclical industries with unstable earnings and cash flows. Market volatility or a recession are likely to result in high short term earnings and cash flow uncertainty which could make it harder to value IEP’s units.
Final thoughts
Carl Icahn has launched a smart counterattack after Hindenburg Research’s short report on the holding company resulted in a major valuation loss. By defiantly declaring a $2.00 per-unit dividend, Icahn Enterprises not only shows that it stands by its distribution, but the announcement was also well timed, resulting in IEP’s unit price soaring on Friday. By declaring a $2.00 per-unit quarterly distribution, Icahn Enterprises has also significantly increased the appeal of IEP as an income unit. I believe the risk profile is still attractive for investors that want to secure a high dividend payout as well as a high yield. For dividend investors this means they can still grab a 21% MLP yield and units may have further rebound potential!
For further details see:
Icahn Enterprises L.P.: Carl Icahn Strikes Back