Shares of Icahn Enterprises (IEP) are getting slaughtered today after the company announced the sale of 2 million units in a secondary offering, diluting shareholders by nearly 2% (announcement available here). This action has sent shares plunging 9%. Still shares are up 67% in 2013 and have rallied in a straight line over the past three months by 75%. With this dilutive action taken by the company, is IEP still an attractive investment?
For years, Carl Icahn had complained that his holding company did not get the respect it deserved based upon his performance. He made this argument because the stock often traded at a discount to book value and has consistently traded at a discount to Warren Buffett's company, Berkshire Hathaway (BRK.A) (BRK.B). Over the past three months, investors have been warming to Icahn with his major win in Netflix (NFLX) and high profile Apple (AAPL) battle, and IEP has been getting some much deserved respect.
As of the last quarter (available here), IEP's book value per share was $53. Icahn also reports a "net asset value," which could be considered analogous to an adjusted book value. Prior to dilution, NAV was $72. Prior to the dilution, IEP was trading at 2x NAV and 2.72x book value. For comparison, Berkshire Hathaway trades at 1.4x book value. When he instituted a buyback, Buffett suggested an adjusted book value about 10-20% higher than reported figures. On an adjusted basis, Berkshire trades about 1.2x.
In other words, the situation has reversed itself with IEP trading at a big premium to Berkshire. Icahn is taking this opportunity to sell some units and get some cash to invest in the business. Moreover, since the deal is being done at such a premium to book value, it will be very accretive for existing investors. This deal will add about $1.56 to book value per share, pushing it to $54.50. NAV per unit will also rise to $73. After this deal and at the current market price, IEP trades at 2.48x book value and 1.8x NAV.
To be a truly great investor, you have to be able to find attractive stocks, but you also have to know when to sell your winners. By doing a secondary, Icahn is effectively selling shares, which will benefit current holders. However, he would not sell shares if he felt IEP was undervalued at $145. Instead, he is taking advantage of some irrational exuberance in the market. When a stock rallies by 75% in three months, it often suggests that there is some forth. Icahn has recognized this and is taking advantage of the opportunity to raise cash at an attractive price.
With that said, how should investors trade IEP now? On both a price basis and at a price to book (or NAV) basis, IEP is a lot cheaper than it was yesterday. Excluding volatile investment gains and losses, IEP can generate $800 million in earnings next year, and the company also pays a solid 3.7% distribution, which I could see being raised next year thanks to strong performance at its operating units. Still, Icahn has clearly stated that $150 is too high for his stock. Even after this drop, IEP is relatively expensive when compared to Berkshire. While I am as confident in Icahn's investing prowess as I ever have been and believe this secondary will be accretive to investors in the long term, I think the stock has some further downside. After all, just a month ago, it was trading $25 lower. I would rather wait to buy shares at 1.5x NAV or $110. Even after a 9% drop, IEP has further downside. I would wait a bit and go long around $110.