2023-09-04 01:36:33 ET
Summary
- Icahn Enterprises has had to cut in half its quarterly distribution to unitholders but still yields 20%.
- IEP is trading at a premium to its net asset value per unit with bearish sentiment remaining high even after a 61% pullback of its valuation year-to-date.
- Continued losses and an expanding unit count imply more future NAV per unit downside.
Icahn Enterprises ( IEP ) last declared a quarterly distribution of $1 per unit , a 50% decrease from its prior distribution and for what's currently a 20% annualized forward yield. The safest yield is surely one that's just been cut and IEP, founded by renowned activist investor and corporate raider Carl Icahn, has seen its valuation collapse by 61% since the start of 2023 as consecutive hikes to the Fed funds rate to a 22-year high at 5.25% to 5.50% got aggregated with what has retrospectively become a pivotal short report from Hindenburg Research back in May. It's been four months since ' The Corporate Raider Throwing Stones From His Own Glass House' was published and the specter of uncertainty still clouds an investment in Icahn Enterprises even with a rightsized distribution.
However, the company is suffering. It recorded dual misses for its most recent fiscal 2023 second quarter with year-over-year revenue dipping 28.6% and net income seeing material weakness. Worryingly for the unitholders, short interest has remained sticky even after the pullback of the company with a further dividend cut and a return of the units to NAV in view. Critically, were these two scenarios to happen, the current year-to-date pullback would look like the good times. The income is the prize and investors who yearned for stability have had this inverted by the chaos catalyzed by the May short report. The reverberations of this report have necessitated another look at the ticker. The current yield is currently far above its historical pre-Hindenburg level and is set against a surging 10-year US Treasury yield currently at 4.18%.
Bears Anchor To The Continued Premium To NAV
The Fed's higher for longer mantra threatens pain for a company that held a total debt of $7.08 billion as of the end of its second quarter. For context, the current market capitalization of Icahn Enterprises stands at $7.96 billion with quarterly interest expenses of $136 million during its second quarter. The conglomerate is structured as a Delaware master limited partnership and operates across a diverse range of segments from Energy, Investment, Pharmaceuticals, Automotive, Home Fashion, Food Packaging, and Real Estate. The company owns Pep Boys and Viskase. Revenue for its second quarter came in at $2.5 billion , a 28.6% decline over its year-ago comp and a miss by $540 million on consensus estimates.
Icahn Enterprises Fiscal 2023 Second Quarter Earnings Presentation
Net income for the quarter was negative at $269 million , around $0.72 per unit, and an increase from a loss of $128 million, around $0.41 per unit, in the year-ago period. It was hard to find a salvo for bulls in the report with Icahn Enterprises reporting a net asset value of $5 billion , around $13.62 per unit. This was a 10.7% decline from $5.6 billion as of the end of 2022. This NAV is a non-GAAP measure and is set against units currently swapping hands for $20.22 per unit. Hence, bears who have had a huge dose of schadenfreude following Icahn's high-profile battles as a corporate raider from Herbalife ( HLF ) to Cheniere Energy ( LNG ), could very well profit from an already deteriorated situation getting worse.
Investments Could Recover As The Fed Set To Pause Further Rate Hikes
To be clear, was Icahn Enterprises to trade on par with its NAV per unit, its valuation would fall 32.6% from its current level. This comes as its rapidly increasing unit count is set to see NAV per unit continue to dip if earnings continue to see marked weakness. Indeed, second quarter adjusted EBITDA of $34 million fell 73% from $126 million in the year-ago comp. However, the company could find it hard to stage a recovery if the US macroeconomic backdrop deteriorates. The Fed is likely done with any further rate hikes and the market is currently pricing in a 94% chance that interest rates remain unchanged at the 20th of September FOMC meeting.
This is up from an 80% probability a week ago on the back of jobs data that saw unemployment rise to 3.8%. Hence, a Goldilocks economic scenario could emerge where the US economy experiences a soft landing with inflation coming back to the Fed's 2% target. This September rate pause scenario is heightened with the repayments of student loans set to resume in October after a pause that lasted for just over three and a half years. Hence, any such dovish pivot could provide a boost to the flagging investments segment of the conglomerate which lost $215 million during the second quarter.
Icahn Enterprises Fiscal 2023 Second Quarter Earnings Form 10-Q
Any euphoria might be short-lived with the Fed's higher for longer mantra likely to come into focus after the pause. Icahn Enterprises also disclosed that it is under an SEC inquiry with the regulator seeking information related to securities offerings, corporate governance, capitalization, and marketing materials, among other materials. Whilst this is likely just procedure, it maintains the specter of uncertainty that still clouds an investment in the conglomerate as $1.1 billion of senior unsecured notes attached to the holding company comes due next year. Icahn Enterprises will likely have to refinance at higher rates than the current 4.75% coupon. Could there be more downside? Perhaps. But the broader market looks set for a rally over the next few months as the Fed looks to open a new chapter with interest rates.
For further details see:
Icahn Enterprises: SEC Inquiry, Halved Distribution, 20% Yield From Carl