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  • Icahn Enterprises L.P. (IEP) Adopts New Dividend Policy, Continues Activism

    Daniel A. Ninivaggi, Chief Executive Officer of Icahn Enterprises (NASDAQ:IEP) said in the latest earnings call last Friday May 3rd that: "At the holding company level, we completed a public equity offering of IEP units in the first quarter. We also adopted a $4 annual dividend policy, resulting in a very attractive yield to our unitholders. Providing additional liquidity in IEP units and our new dividend policy are part of our strategy to broaden and strengthen our shareholder base. We also believe creating more liquidity in IEP units will provide us more financial flexibility to pursue our activist strategy and make it even more effective." Carl C. Icahn, Chairman of the Board for Icahn Enterprises is well known for his activist stance. IEP shares yesterday were up by over 4% and are again up today.

    (click to enlarge)
    IEP Share Price Performance Relative to Peers

    It should be noted that CapitalCube's Corporate Actions Report on Icahn Enterprises suggested that the fundamentals did not support an increase in dividends. Our preliminary analysis indicates that the new dividend policy is supported primarily by financing activities i.e. issuance of new equity.

    Earnings Analysis

    We analyzed the first quarter earnings for Icahn Enterprises L.P. using our proprietary peer-based methodology. Our analysis is based on the company's performance over the last twelve months (unless stated otherwise). We also examine the Accounting Quality of IEP and conclude that the company's financials suggest possible sandbagging of net income.

    (click to enlarge)IEP Accounting Quality Relative to Peers

    We used the following peer-set for analyzing Icahn Enterprises: C.P. Pokphand Co. Ltd. ADS (OTCPK:CPKPY), Mitsubishi Corp. ADS (OTCPK:MSBHY), Mitsui & Co. Ltd. ADS (OTCPK:MITSY), Itochu Corp. (OTCPK:ITOCF), Sega Sammy Holdings Inc. ADS (OTCPK:SGAMY), Vesuvius PLC, Alfa S.A.B. de C.V. (OTCPK:ALFFF), AutoZone Inc. (NYSE:AZO), O'Reilly Automotive Inc. (NASDAQ:ORLY) and Advance Auto Parts Inc. (NYSE:AAP).

    The table below shows the preliminary results along with the recent trend for revenues, net income and returns.

     

     

    Quarterly (USD million)2013-03-312012-12-312012-09-302012-06-302012-03-31
    Revenues4,763.04,278.04,674.04,206.02,676.0
    Revenue Growth %11.3(8.5)11.157.2(16.4)
    Net Income271.018.078.0235.048.0
    Net Income Growth %1,405.6(76.9)(66.8)389.6(81.2)
    Net Margin %5.70.41.75.61.8
    ROE % (Annualized)21.21.56.419.94.4
    ROA % (Annualized)4.30.31.34.20.8

    (click to enlarge)IEP Revenues Trend

    (click to enlarge)IEP Net Margin Trend

    Valuation Drivers

    Icahn Enterprises L.P. trades at a lower Price/Book multiple (1.5) than its peer median (3.7). The market expects IEP to grow at about the same rate as its chosen peers (PE of 13.4 compared to peer median of 14.8) and to maintain the peer median return (ROE of 12.1%) it currently generates.

    The company's profit margins are below peer median (currently 3.4% vs. peer median of 6.2%) while its asset efficiency is about median (asset turns of 0.8x compared to peer median of 0.8x). IEP's net margin is greater than (but within one standard deviation of) its four-year average net margin of 1.2%.

    Economic Moat

    The company has achieved better revenues growth than its chosen peers (year-on-year change in revenues of 32.8%) but its earnings growth performance has been below the median (change in annual reported earnings of -48.4% compared to the peer median of 9.6%). This suggests that, compared to its peers, the company is focused more on top-line revenues. IEP is currently converting every 1% of change in revenue into -1.5% change in annual reported earnings.

    IEP's return on assets is less than its peer median currently (2.5% vs. peer median 4.4%). It has also had less than peer median returns on assets over the past five years (0.7% vs. peer median 3.5%). This performance suggests that the company has persistent operating challenges relative to peers.

    The company's gross margin of 20.2% is around peer median suggesting that IEP's operations do not benefit from any differentiating pricing advantage. However, IEP's pre-tax margin is more than the peer median (7.8% compared to 6.3%) suggesting relatively tight control on operating costs.

    Growth & Investment Strategy

    While IEP's revenues have grown faster than the peer median (26.9% vs. 7.7% respectively for the past three years), the market gives the stock an about peer median PE ratio of 13.4. This suggests that the market has some questions about the company's long-term strategy.

    IEP's annualized rate of change in capital of 23.0% over the past three years is greater than the peer median of 10.4%. This relatively high investment has generated a less than peer median return on capital of 4.2% averaged over the same three years. The relatively high investment and low current returns lead us to believe that the company is betting heavily on the future.

    Earnings Quality

    IEP reported relatively weak net income margins for the last twelve months (3.4% vs. peer median of 6.2%). This weak margin performance and relatively conservative accrual policy (5.0% vs. peer median of 4.1%) suggest the company might likely be understating its net income, possibly to the extent that there might even be some sandbagging of the reported net income numbers.

    IEP's accruals over the last twelve months are positive suggesting a buildup of reserves. In addition, the level of accrual is greater than the peer median -- which suggests a relatively strong buildup in reserves compared to its peers.

    Company Profile

    Icahn Enterprises LP is a holding company, which through its subsidiaries, engaged in nine primary business segments: Investment, Automotive, Energy, Gaming, Railcar, Food Packaging, Metals, Real Estate and Home Fashion.

    Disclaimer

    The information presented in this report has been obtained from sources deemed to be reliable, but AnalytixInsight does not make any representation about the accuracy, completeness, or timeliness of this information. Please read our full disclaimer here.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    May 08 10:25 AM | Link | Comment!
  • Dividend Quality Analysis On Chesapeake Energy Corp. (CHK)

    This week we're taking a close look at Chesapeake Energy Corp.'s (NYSE:CHK) stock. Earlier this week we published our Fundamental Analysis and Corporate Actions assessment of the company. Today we assess its Dividend Quality. Chesapeake gets two stars from us for its Medium Dividend Quality and one star for its Dividend Quality trend; our overall score for its Dividend Quality is 25. For more on how we compute our Dividend Quality score read here.

    The following peer set has been used in our analysis: Anadarko Petroleum Corp.(NYSE:APC), EOG Resources Inc.(NYSE:EOG), Apache Corp.(NYSE:APA), Devon Energy Corp.(NYSE:DVN), Williams Companies Inc(NYSE:WMB), Noble Energy Inc.(NYSE:NBL), Hess Corp.(NYSE:HES) and EQT Corp.(NYSE:EQT).

    (click to enlarge)

    Overview
    • Over the last twelve months (prior to 2012-09-30), Chesapeake Energy Corp. paid a medium quality dividend, which represents a yield of 2.1% at the current price.
    • Dividend quality trend has not been consistent over the last five years. Dividends were paid during each of these years -- of these 3 were medium quality and 2 were low quality.
    • The ending cash balance is less than the last full year dividend payment and cannot be relied on to cushion any significant reduction of cash flows in the future.

    Company numbers are TTM (trailing twelve months) or latest available. Share price data is previous day's close unless otherwise stated.

    Dividend Yield and Payout

    Cash flow coverage of the dividend paid is more relevant than dividend payout.
    While traditional dividend analysis focuses on dividend payout from net income, we focus on the cash flow coverage of dividends (paid to the common stock) in order to determine their quality and sustainability. We assess whether dividends are being paid from operating, investing and issuance cash flows or whether the beginning cash balance is needed to make this payment. We make the assumption that cash dividends are paid only after net debt repayments. We consider the cash outflow from share buybacks to be discretionary and thus ignore its impact on cash required to support the dividend policy.

    Dividends that are fully covered from operating and investing cash flow net of any cash outflow from debt repayments and net of a decrease in deposits (for banks) are considered to be "high quality". Those that require an additional net cash inflow from issuance are categorized as "medium quality". If operating, investing and issuance cash flows are not sufficient to fund the dividend and the beginning cash balance is used, the dividend is referred to as "low quality".

    This last category is most at risk of a dividend cut though we recognize that companies that have a large cash balance could continue to pay dividends even with a "low quality" dividend profile. For all these definitions, we assume the cash outlay for share buybacks is discretionary and can instead be used to support dividends.

    Chesapeake Energy Corp.'s dividend payout is below its peer median.
    Over the last twelve months (prior to 2012-09-30), Chesapeake Energy Corp.'s dividend payout of -24.3% and the corresponding dividend yield of 2.1% (relative to the current price) compare to a peer median level of 15.1% and 0.9% respectively. Relative to its peers, the firm is generating a high dividend yield. However, its dividend payout is negative which suggests a likely downward pressure on the dividend based on this traditional analysis.

    Dividend Coverage

    Over the last twelve months (prior to 2012-09-30), Chesapeake Energy Corp. paid a medium quality dividend.
    The source of the company's cash to support the dividend paid over the last twelve months is operating cash flow (coverage of 10.4x), investing cash flow (coverage of -25.8x), issuance cash flow (coverage of 16.4x) and twelve-month prior cash (coverage of 0.3x), for a total dividend coverage of 1.8x.

    These coverage ratio factors imply that the firm's net cash inflow from issuance was required (in addition to operating and investment cash) to pay the dividend, which suggests a medium dividend quality. Chesapeake Energy Corp.'s dividend quality is not in line with the majority of its peers, which comprise 1 high quality, 3 medium quality and 4 low quality.

    Dividend quality varied between medium and low over the last five years.
    Chesapeake Energy Corp. has paid a dividend in each of its last five years. The distribution of dividend quality over this period consists of 3 medium and 2 low. In particular, the dividends paid in the two most recent years were of medium quality. During this period, the medium quality dividend coverage has remained more or less stable at 2.2x relative to the prior year.

    Chesapeake Energy Corp.'s dividend has a weak cushion from the ending cash balance.
    Though the dividend yield is high relative to peers, it is of medium quality in this period. Assuming the cash dividend paid remains constant, the medium quality coverage would need to deteriorate by 7% before the company dips into its beginning cash balance to fund the dividend payment.

    This level of deterioration overall cash flows is possible in the course of business suggesting a current dividend quality that is less robust. The ending cash balance is less than the last full year dividend payment and cannot be relied on to cushion any significant reduction of cash flows in the future.

    Company Profile

    Chesapeake Energy Corp. explores, develops and produces oil and natural gas properties. Its principal activities include discovering and developing unconventional natural gas and oil fields onshore in the U.S. The company has also vertically integrated its operations and owns substantial marketing, midstream and oilfield services businesses directly and indirectly through its subsidiaries Chesapeake Energy Marketing, Inc., Chesapeake Midstream Development LP, Chesapeake Oilfield Services LLC, and Chesapeake Midstream Partners LP. Chesapeake Energy operates its business though the following segments: Exploration and Production; Natural Gas and Oil Marketing; Gathering and Compression; and Oilfield Services. The Exploration and Production segment is responsible for finding and producing natural gas and oil. The Marketing, Gathering and Compression segment is responsible for marketing, gathering and compression of natural gas and oil primarily from Chesapeake-operated wells. The Oilfield Services segment is responsible for contract drilling, oilfield trucking, oilfield rental, pressure pumping and other oilfield services operations for both Chesapeake-operated wells and wells operated by third parties. The company was founded by Aubrey K. McClendon and Tom L. Ward on May 18, 1989 and is headquartered in Oklahoma City, OK.

    Disclaimer

    The information presented in this report has been obtained from sources deemed to be reliable, but AnalytixInsight does not make any representation about the accuracy, completeness, or timeliness of this information. This report was produced by AnalytixInsight for informational purposes only and nothing contained herein should be construed as an offer to buy or sell or as a solicitation of an offer to buy or sell any security or derivative instrument. This report is current only as of the date that it was published and the opinions, estimates, ratings and other information may change without notice or publication. Past performance is no guarantee of future results. Prior to making an investment or other financial decision, please consult with your financial, legal and tax advisors. AnalytixInsight shall not be liable for any party's use of this report. AnalytixInsight is not a broker-dealer and does not buy, sell, maintain a position, or make a market in any security referred to herein. One of the principal tenets for us at AnalytixInsight is that the best person to handle your finances is you. By your use of our services or by reading any of our reports, you're agreeing that you bear responsibility for your own investment research and investment decisions. You also agree that AnalytixInsight, its directors, its employees, and its agents will not be liable for any investment decision made or action taken by you and others based on news, information, opinion, or any other material generated by us and/or published through our services. For a complete copy of our disclaimer, please visit our website analytixinsight.com.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Dec 27 11:08 AM | Link | Comment!
  • Chesapeake Energy Corp. (NYSE:CHK): Possible Merger Target?

    Today we assess if Chesapeake Energy Corp. (NYSE:CHK) could be a likely merger target or an acquirer within its peer group. The peer set we use for our analysis comprises: Anadarko Petroleum Corp.(NYSE:APC), EOG Resources Inc.(NYSE:EOG), Apache Corp.(NYSE:APA), Devon Energy Corp.(NYSE:DVN), Williams Companies Inc(NYSE:WMB), Noble Energy Inc.(NYSE:NBL), Hess Corp.(NYSE:HES) and EQT Corp.(NYSE:EQT).

    If you missed our Fundamental Analysis on the company published earlier this week click here.

    Overview
    • Chesapeake Energy Corp.'s relative size and current valuation make it a possible merger target within this peer group.
    • Chesapeake Energy Corp. could achieve growth through acquisitions as it is big enough (by book value) and has only a modest level of goodwill on its balance sheet, but its valuation is not high enough to make acquisitions within this peer group easy.
    • Downward pressure on Chesapeake Energy Corp.'s dividends due to relatively weak operating results, low interest coverage and a weak cash cushion (for the dividend) is offset by the medium dividend quality, which does not indicate the need to change dividend policy in the short-term.
    • While the company's share price is sufficiently below its 52-week high (currently about 35% below) it does not have a positive free cash flow, which suggests that a share buyback at this time may not be prudent.

    Company numbers are TTM (trailing twelve months) or latest available. Share price data is previous day's close unless otherwise stated.This report does not predict dividend or equity actions but highlights corporate actions that are supported by fundamental company performance and corporate finance principles.

    M&A Action

    Why merge or acquire?

    Companies typically acquire to realize economies of scale, scope, gain customers, bundle complementary products, or gain vertical integration. From an investor's perspective, these business reasons fall into natural screening categories that include: (a) buying companies to boost growth expectations; (b) buying to realize cost synergies; and (c) buying earnings through acquisitions that increase EPS.

    Potential targets would typically be smaller than their peers though sometimes targets can be marginally larger than the acquirer. As a result, when identifying a company as a target, we check for a book value that is up to 80% more than the peer median. In addition, we also filter for a cheap valuation relative to peers (i.e. price to book is less than the peer median) and a share price that is trading sufficiently (i.e. at least 20%) below its 52-week high.

    M&A Target Conditions  Chesapeake Energy Corp.ComparablePass/Fail
    Book value<=1.8 x Peer median12,265.023,452.6Pass
    % below 52-week high share price>=20%34.820Pass
    Price to book (P/B)<=1.2 x Peer median*0.92.2Pass
    * We use a 20% tolerance (0.8-1.2x) around the median.     

    Typically, acquirers are larger than their peers though, as mentioned above, targets can sometimes be marginally larger than the acquirer. To identify a company as an acquirer, we look for a book value that is around or more than the peer median and for growth expectations (measured by its price to earnings or P/E) that are lower than peer median. In addition, we consider whether the company has the capacity to add intangible assets (like goodwill) and whether its valuation (measured by its price to book or P/B) is attractive relative to its peers.

    M&A Acquirer Conditions  Chesapeake Energy Corp.ComparablePass/Fail
    Book value>=0.8 x Peer median12,265.010,423.4Pass
    Price to earnings (P/E)<=1.2 x Peer median*N/A41.7N/A
    Net tangible assets to equity>=25%99.825Pass
    Price to book (P/B)>=0.8 x Peer median*0.91.5Fail
    * We use a 20% tolerance (0.8-1.2x) around the median.     

    Relative size and current market value make Chesapeake Energy Corp. a possible merger target within this peer group.
    With a book value of USD12,265 million, Chesapeake Energy Corp. could be acquired by others within this peer group. It may also be a possible target now because its share price is reasonably off its 52-week high and not so high in relation to book (P/B is lower than peers) that it would deter an acquirer.
    Chesapeake Energy Corp.'s relative valuation (P/B) is not high enough to suggest acquisitions in this peer group.
    Chesapeake Energy Corp. could achieve growth through acquisitions as it is big enough (by book value) and has room for more goodwill on its balance sheet. Acquisitions in this peer group would be more likely if its relative valuation (P/B) was higher.

    (click to enlarge)

    Dividend Action

    Dividend cut, increase or initiate?
    Log-in to see this report.

    Share Buyback

    Is the company likely to buy back shares?

    Log-in to see this report.

    Company Profile

    Chesapeake Energy Corp. explores, develops and produces oil and natural gas properties. Its principal activities include discovering and developing unconventional natural gas and oil fields onshore in the U.S. The company has also vertically integrated its operations and owns substantial marketing, midstream and oilfield services businesses directly and indirectly through its subsidiaries Chesapeake Energy Marketing, Inc., Chesapeake Midstream Development LP, Chesapeake Oilfield Services LLC, and Chesapeake Midstream Partners LP. Chesapeake Energy operates its business though the following segments: Exploration and Production; Natural Gas and Oil Marketing; Gathering and Compression; and Oilfield Services. The Exploration and Production segment is responsible for finding and producing natural gas and oil. The Marketing, Gathering and Compression segment is responsible for marketing, gathering and compression of natural gas and oil primarily from Chesapeake-operated wells. The Oilfield Services segment is responsible for contract drilling, oilfield trucking, oilfield rental, pressure pumping and other oilfield services operations for both Chesapeake-operated wells and wells operated by third parties. The company was founded by Aubrey K. McClendon and Tom L. Ward on May 18, 1989 and is headquartered in Oklahoma City, OK.

    Disclaimer

    The information presented in this report has been obtained from sources deemed to be reliable, but AnalytixInsight does not make any representation about the accuracy, completeness, or timeliness of this information. This report was produced by AnalytixInsight for informational purposes only and nothing contained herein should be construed as an offer to buy or sell or as a solicitation of an offer to buy or sell any security or derivative instrument. This report is current only as of the date that it was published and the opinions, estimates, ratings and other information may change without notice or publication. Past performance is no guarantee of future results. Prior to making an investment or other financial decision, please consult with your financial, legal and tax advisors. AnalytixInsight shall not be liable for any party's use of this report. AnalytixInsight is not a broker-dealer and does not buy, sell, maintain a position, or make a market in any security referred to herein. One of the principal tenets for us at AnalytixInsight is that the best person to handle your finances is you. By your use of our services or by reading any of our reports, you're agreeing that you bear responsibility for your own investment research and investment decisions. You also agree that AnalytixInsight, its directors, its employees, and its agents will not be liable for any investment decision made or action taken by you and others based on news, information, opinion, or any other material generated by us and/or published through our services. For a complete copy of our disclaimer, please visit our website analytixinsight.com.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Dec 26 12:54 PM | Link | Comment!
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