Icahn Enterprises - Marking Icahn's IEP To Market Implies Significant Downside Risk To Share Price; -19% Expected Return

| About: Icahn Enterprises (IEP)

Summary

Carl Icahn is an iconic investor, returning 11% annualized to investors of Icahn Capital from 2004 to 9/30/15.

Investors have recognized Icahn’s investment acumen by ascribing Icahn’s public vehicle IEP a consistent premium to net asset value.

However, on a mark-to-market basis, IEP’s NAV has dropped precipitously and the price of IEP has not kept pace (-25% NAV drop vs. -7% price drop YTD through 1/13/16).

Simply marking IEP to market as of 1/13/16 results in a price target of $45 (vs. $57 currently) to stay consistent with the same P/NAV of 132% as on 12/31/15.

The $45 price target implies -19% return from the closing price on 1/13/16 with further downside if the "Icahn Premium" erodes.

Thesis

Nobody doubts the investment acumen of Carl Icahn. Even including the "Great Recession" of 2008, Icahn was able to compound capital at 11%/annum from 2004 to 9/30/15, as seen below (p. 15 of 9/30/15 investor presentation):

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Based on the historical valuation premium on a price/NAV basis, it is clear that the market has ascribed an "Icahn premium" to Icahn Enterprises LP (NASDAQ:IEP) consistently since 2013. The chart below shows price to NAV ("P/NAV") from 12/31/2012. As you can see, in 2013-2015, the market consistently ascribed a premium to IEP, ranging from 113%-140%. Provided for convenience is a percentile chart to the right, which outlines the median P/NAV from 2012 to 9/30/15 as 129%, with a maximum of 140%:

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Now that we have this backdrop, we can move toward the thesis. Given the set of facts available to investors, one can create an intra-period mark-to-market on IEP. Sources for the mark-to-market exercise are:

As outlined in the calculation below, all we have done is to perform a mark-to-market at the following dates:

  • 9/30/15 Original - Straight from the IEP presentation (so ties completely)
  • 9/30/15 Adjusted - Started with IEP's calculation and simply adjusted for market values of Tropicana and Viskase vs. IEP valuation (which uses ascribed EBITDA multiples)
  • 12/31/15 - Refreshed security prices to 12/31/15 and reran NAV
  • 1/13/15 -- Refreshed security prices to 1/13/16 and reran NAV

Please find the mark-to-market analysis below. Essentially, all that was done to arrive at the current mark-to-market value of IEP was to:

  • Update the pricing of the securities owned in IEP (CVI; CVRR; FDML; ARII) by simply multiplying shares owned by the prices at the relevant dates
  • Update the pricing of the securities owned in Icahn Capital and calculating the fund's P&L post-9/30/15. We then apply 46.1% of the post-9/30/15 P&L back to IEP based on IEP's interests in Icahn Capital ($4,168 mm out of $9,047 as of 9/30/15, per p. 15 of the latest presentation)
  • Mark Tropicana and Viskase to market by simply multiplying shares owned by the prices at the relevant dates (vs. IEP's methodology of applying an EBITDA multiple at its discretion)

When we mark IEP's NAV to market, it shows a very large degradation vs. even 12/31/15, given (I) the large decline in energy holdings and Apple; and (II) the large amount of leverage at IEP which then magnifies the impact of the losses to IEP equity value. Since 12/31/15 through the close on 1/13/16, IEP's Net Asset Value has declined -25.0%, but the stock price has only declined -7.3% leading to a current P/TBV of 163%:

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For detail on the mark-to-market change in IEP's interest in Icahn Capital, please see below. Please note that the "Notional $ 9/30/15" column is there to tie out to the investor presentation top holdings so investors can check the work (p. 16):

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Putting it all together

As we have laid out, the NAV of IEP has decreased -25.0%, but the stock price has only declined -7.3% leading to a current P/TBV of 163%. To put this in perspective, this puts IEP's premium to NAV at the highest amount in the history of the security trading (which was previously 140%. We simply amend the historical P/NAV chart to add the current level and where IEP is on a percentile basis (100% of observed quarterly P/NAV valuations):

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Given the current P/NAV level of IEP, we expect IEP to trade down precipitously once the current mark-to-market NAV level is understood by investors. Regarding a price target, based on the current 1/13/15 closing levels of the underlying securities:

  • 12/31/15 P/NAV Retracement - In this scenario, we would expect IEP to trade to a P/NAV of 132%, in line with the 12/31/15 trading level. This would imply a price target of $46, implying -19% downside from the $57 close on 1/13/15
  • Median P/NAV Retracement - In this scenario, we would expect IEP to trade to a P/NAV of 129%, in line with the 9/31/15 trading level. This would imply a price target of $45, implying -21% downside from the $57 close on 1/13/15

Of course, the price targets above imply investors are still willing to pay the "Icahn Premium", despite the performance in Q4-15 and month-to-date 1/13/15…

Appendix A: IEP Calculation of 9/30/15 NAV

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Disclosure: I am/we are short IEP.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Additional disclosure: Additional Disclosure: The author and/or others he advises holds short a position in IEP at the time of publishing this article. The author may make trades in securities mentioned without notification. The information contained in this article is impersonal and not tailored to the investment needs of any specific person. You should consult with a professional where appropriate. The author shall not be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. The opinions expressed in this article are for informational purposes only and should not be construed as investment advice. The article is not a recommendation of, or an offer to sell or solicitation of an offer to buy, any particular security, strategy or investment product. The research for this article is based on public information that the author considers reliable, but the author does not represent that the research or the article is accurate or complete, and it should not be relied on as such. The views and opinions expressed herein are current as of the date of this article and are subject to change. Any projections, forecasts and estimates contained in this article are necessarily speculative in nature and are based upon certain assumptions. In addition, matters they describe are subject to known (and unknown) risks, uncertainties and other unpredictable factors, many of which are beyond the author's control. No representations or warranties are made as to the accuracy of such forward-looking assumptions. It can be expected that some or all of such forward-looking assumptions will not materialize or will vary significantly from actual result.