As an individual value investor, I am often frustrated with the inability to exert any type of influence over the companies that I invest in. Individual investors lack the ability to influence management and board decisions because they do not own large enough stakes in the underlying companies for their voices to be heard. The result is that they are subject to the whims of management teams whose own self interests are not always aligned with the best interest of shareholders.
We have all witnessed the destruction of value resulting from poor decision making, overpaying for acquisitions and inefficient use of capital by entrenched management teams over and over again.
Unfortunately, no matter how much research one conducts in identifying undervalued investment situations, a bad management team’s inability or unwillingness to unlock value for shareholders can lead to even the greatest ideas not panning out. I have always idolized the actions of activist investors like Carl Icahn and Nelson Peltz who have the ability to force underperforming management teams to take actions which maximize value for shareholders.
Icahn Enterprises (NASDAQ:IEP), offers individual investors a rare opportunity to invest with one of the most seasoned activists alive today. Best of all, the management team and largest shareholder is Carl Icahn himself. As of September 30, 2011, affiliates of Mr. Icahn owned 79,238,262 depositary units which represented approximately 92.6% of the outstanding depositary units.
Icahn Enterprises is a diversified investment company run by Carl Icahn and structured as a master limited partnership. The holding company is engaged in eight primary business segments: Investment, Automotive, Gaming, Railcar, Food Packaging, Metals, Real Estate and Home Fashion.
Some of IEP's larger investments include approximately 76.8% of the total outstanding common stock of Federal-Mogul (NASDAQ:FDML), approximately 61.7% of the total outstanding common stock of Tropicana (TPCA.PK) and approximately 55.3% of the total outstanding common stock of American Railcar Industries (NASDAQ:ARII)
Below, I have included a brief description of some of IEP's businesses, compliments of the recent 10-Q:
IEP conducts its Automotive segment through its majority ownership in Federal-Mogul. Federal-Mogul is a leading global supplier of technology and innovation in vehicle and industrial products for fuel economy, emissions reduction, alternative energies, environment and safety systems. Federal-Mogul serves the world's foremost original equipment manufacturers (“OEM”) of automotive, light commercial, heavy-duty, industrial, agricultural, aerospace, marine, rail and off-road vehicles, as well as the worldwide aftermarket. As of September 30, 2011, Federal-Mogul is organized into four product groups: Powertrain Energy, Powertrain Sealing and Bearings, Vehicle Safety and Protection, and Global Aftermarket.
IEP conducts its Gaming segment through its majority ownership in Tropicana. Tropicana currently owns and operates a diversified, multi-jurisdictional collection of casino gaming properties. The eight casino facilities it operates feature approximately 411,000 square feet of gaming space with 7,448 slot machines, 223 table games and 6,048 hotel rooms with three casino facilities located in Nevada, two in Mississippi and one in each of Indiana, Louisiana and New Jersey. In addition, in August 2010 Tropicana acquired a resort under development in Aruba.
IEP conducts its Railcar segment through its majority ownership in ARI (NASDAQ:ARII). ARI manufactures railcars, which are offered for sale or lease, custom designed railcar parts and other industrial products, primarily aluminum and special alloy steel castings. These products are sold to various types of companies including leasing companies, railroads, industrial companies and other non-rail companies. ARI provides railcar repair and maintenance services for railcar fleets. In addition, ARI provides fleet management and maintenance services for railcars owned by certain customers. Such services include inspecting and supervising the maintenance and repair of such railcars.
IEP conducts its Metals segment through its indirect wholly owned subsidiary, PSC Metals, Inc. (“PSC Metals”). PSC Metals collects industrial and obsolete scrap metal, processes it into reusable forms and supplies the recycled metals to its customers including electric-arc furnace mills, integrated steel mills, foundries, secondary smelters and metals brokers. PSC Metals' ferrous products include shredded, sheared and bundled scrap metal and other purchased scrap metal such as turnings (steel machining fragments), cast furnace iron and broken furnace iron. PSC Metals also processes non-ferrous metals including aluminum, copper, brass, stainless steel and nickel-bearing metals. Non-ferrous products are a significant raw material in the production of aluminum and copper alloys used in manufacturing. PSC Metals also operates a secondary products business that includes the supply of secondary plate and structural grade pipe that is sold into niche markets for counterweights, piling and foundations, construction materials and infrastructure end-markets.
IEP's Real Estate segment consists of rental real estate, property development and resort activities. As of September 30, 2011 and December 31, 2010, they owned 30 rental real estate properties. Their property development operations are run primarily through Bayswater Development LLC, a real estate investment, management and development subsidiary that focuses primarily on the construction and sale of single-family and multi-family homes, lots in subdivisions and planned communities and raw land for residential development. Their New Seabury development property in Cape Cod, Massachusetts and their Grand Harbor and Oak Harbor development property in Vero Beach, Florida each include land for future residential development of approximately 326 and 870 units of residential housing, respectively. Both developments operate golf and resort operations as well.
IEP conducts its Home Fashion segment through its majority ownership in WestPoint International, LLC, a manufacturer and distributor of home fashion consumer products. WPI is engaged in the business of manufacturing, sourcing, designing, marketing, distributing and selling home fashion consumer products. WPI markets a broad range of manufactured and sourced bed, bath, basic bedding and kitchen textile products, including, sheets, pillowcases, comforters, flocked blankets, woven blankets and throws, heated blankets, quilts, bedspreads, duvet covers, bed skirts, bed pillows, feather beds, mattress pads, drapes, bath and beach towels, bath rugs, kitchen towels and kitchen accessories. WPI recognizes revenue primarily through the sale of home fashion products to a variety of retail and institutional customers. In addition, WPI receives a small portion of its revenues through the licensing of its trademarks.
IEP conducts its Food Packaging segment through its majority ownership in Viskase Companies, Inc (VKSC.PK). ("Viskase"). Viskase is a worldwide leader in the production and sale of cellulosic, fibrous and plastic casings for the processed meat and poultry industry. Viskase currently operates seven manufacturing facilities and nine distribution centers throughout North America, Europe and South America and derives approximately 70% of its total net sales from customers located outside the United States. Viskase believes it is one of the two largest manufacturers of non-edible cellulosic casings for processed meats and one of the three largest manufacturers of non-edible fibrous casings. In fiscal 2011, Viskase is constructing a manufacturing and distribution facility in Asia.
IEP shares closed at $37.24 which is a 12% discount to its Q3 2011 book value of $42.43. While it is difficult to estimate the current book value due to the uncertainty of IEP’s diverse investment portfolio including short positions, it is reasonable to assume that book value may have increased since they last reported. The S&P 500 has gained 12.9% since the end of Q3 2011. Since IEP is diversified, and it is leveraged to the general economy and markets, using the performance of the S&P 500 as a proxy would indicate that book value may have increased to $47.90.
Looking at some of their larger holdings also indicates an increase in book value since last quarter. Federal Mogul share price has gained 5%. American Rail share price has increased 75%. Tropicana share price has grown 17%, and Viskase has fallen 3%
I recommend buying IEP below $40.00 vs. shorting an equivalent dollar amount of the S&P500 to minimize market risk. According to a recent article in the New York Post, Carl Icahn’s hedge fund is rumored to have returned 35% in 2011 which also bodes well for IEP. His hedge fund investors are charged 2% management fees and 25% of profits. IEP allows you to invest with Icahn for free. Carl has $2.95 billion of his own money invested in IEP. That is pretty strong motivation for him to maximize value for IEP shareholders.
IEP recently announced a $500 million rights offering at $36.79 and Carl Icahn has also stated that he intends to exercise his rights. That means he will be adding an additional 12.58mm shares worth $463mm of IEP to his holdings. If IEP is good enough for a great value creator like Carl Icahn then it belongs in your portfolio as well. The opportunity to buy IEP below book is too hard for this value investor to pass up.
Make sure to use tight limit orders when trading IEP since it is very thinly traded.
Disclosure: I am long IEP.
Additional disclosure: Disclosure: I am long IEP and may buy or sell IEP over the next three days. I am short the S&P500 and may buy or sell the S&P500 over the next three days.