- The recent drop in Herbalife has hit units of Icahn Enterprises.
- Icahn Enterprises has strong operating companies and a large position in Carl Icahn's Funds.
- With $800 million in operating earnings, a nearly 6% dividend, and access to Icahn's Holdings, IEP should trade 50% higher than NAV or about $115.
Every day Carl Icahn seems to be in the news, whether it is a fight with rival Bill Ackman or his recent push against eBay (NASDAQ:EBAY). However, his primary investment vehicle, Icahn Enterprises (NASDAQ:IEP), has had a rough month, falling over 9%. In the following chart, I compare IEP's performance to one of Icahn's well-publicized positions, Herbalife (NYSE:HLF). As concerns have grown that Herbalife could face action from the FTC over its business model, shares have plummeted 20%. This drop has seeped over into IEP. However, Icahn Enterprises is far more than a position in Herbalife, and shares look attractive at current levels.
Icahn Enterprises both owns companies in their entirety and holds positions in publicly traded stocks through a stake in Carl Icahn's investment fund. Icahn Enterprises has a total market capitalization of about $12 billion, and it generated about $1 billion in net income and $1.9 billion in adjusted EBITDA last year, though these figures can be impacted by realized gains and losses on investments (financial and operating data available here) In 2014, I expect operating net income (excluding investment gains and losses) to be roughly $800 million. At the same time, investment in the fund amounts to $3.7 billion. If you give operating companies a 12x multiple and add the investment fund, there is a fair value of about $13.5 billion or roughly $115 per unit.
Icahn Enterprises also points investors to net asset value, which is different than book value to reflect the difference between an asset's carrying value and its fair value. This metric is similar to Warren Buffett's adjusted book value, which he has said is about 20% higher than Berkshire Hathaway's (NYSE:BRK.A)(NYSE:BRK.B) stated book value. As of December 31 2013, IEP had an indicative book value of about $9.1 billion. This is roughly $78 per unit. Even at $102, IEP is trading at a sizable premium to net asset value while many financial institutions like Bank of America (NYSE:BAC) trade at a discount to book value.
This premium is justified. Carl Icahn has proven to be an extraordinary investor who is still at the top of his game with successful investments over the past few years in biotech and industrial firms, while his high-profile investment in Apple (NASDAQ:AAPL) has also been fruitful. Icahn can generate a higher return on investment than most other managers and firms, and as a consequence, a premium is justified. Furthermore, net asset value continues to grow. While Herbalife is down 33% year to date, Forest Laboratories (NYSE:FRX) is up 60% thanks to a takeover. Icahn's position in HLF is a small position in his portfolio at less than 10% of all holdings (holdings available here). Icahn has many winners that can more than offset problems with Herbalife, which may prove to be temporary.
With strong operations at subsidiaries like Federal-Mogul (NASDAQ:FDML) and CVR Energy (NYSE:CVI), Icahn Enterprises also hiked its distribution to $1.50 per share for a current yield of 5.9%. Net asset value is obviously dragged down by debt, with holding company debt of $4 billion. This bill is not due today with some maturities extending over a decade. Given his strong returns and currently low interest rates, the present value of these obligations for IEP is less than $4 billion, which is a further reason for IEP's premium to book value.
There are few ways to invest with titans unless you have hundreds of millions. Berkshire Hathaway and Icahn Enterprises are the two best vehicles to invest with great investors. While Berkshire is touching all-time highs, IEP is down 33% from its 52 week high even as Icahn keeps having winners like FRX. At the same time, IEP is generating a lot of cash and is now paying a 5.9% dividend. Federal Mogul and CVR Energy are benefiting from secular growth trends, while Icahn has shown an ability to generate above-market returns. In fact, NAV is up 50% year over year. With that growth rate, IEP should trade at a substantial premium to NAV. I believe investors should be willing to pay 1.5x NAV given the firm's strong operations and solid investment portfolio, which translates to about $115. IEP is an attractive buy at current levels, with the HLF drop providing investors with a great entry point.