Thinking about Investing in the Name Carl Icahn? 

Tuesday, May 24th, 2016

Carl Icahn is one of the world’s most famous investors. Looking on the New York Stock Exchange, you can invest with him through his master limited partnership (MLP), Icahn Enterprises (IEP).

One area of concern we have previously discussed is the listing as an MLP fund. These can be a headache come tax time, as they have various rules that change the cost basis and how distributions are taxed. We recommend understanding the tax repercussions of these funds before investing in them.

Icahn Enterprises is in the sector of conglomerates, since they have various businesses within the MLP. These businesses are in investments, automotive, energy, metals, railcar, gaming, mining, food packaging, real estate, and home fashion. It has either majority or full ownership in companies such as Pep Boys, CVR Energy, American Railcar Industries, Tropicana, Trump Entertainment Resorts, WestPoint Home, and a few others.

The current price for Icahn Enterprises is $54.54, which is well off of its 52-week high of $92.20. The 52-week low is $42.50.

Sales as a whole for the most recent quarter were $3 billion, and net income was negative $837 million. Sales have declined 26% over the last twelve months, while EPS has fallen by 1,078% during the same time frame.

Looking at the valuation ratios, there are no earnings, which means there is no P/E. Price/sales of 0.55 isn’t too bad, as it is only slightly above the industry average of 0.49.

Price/tangible book is concerning at 67.53, well above the industry average of 3.9. This could be due to goodwill and other intangible assets that were taken on from the recent acquisition of Pep Boys. Price/cash flow is immaterial, which is concerning. Cash flow is very important for the success of any business.  

Currently there is a dividend yield of 10.9%, but since there are no earnings, there is no payout ratio. With no earnings, the stability of that high yield may be in question.

The company has a lot of debt on the balance sheet, amounting to a total of $12.5 billion. This gives the company a very risky debt-to-equity of nearly 500%.

Looking deeper, you can see the investment section of the company had the biggest drag on the MLP, with a net loss of $983 million. A loss of $450 million was attributable to Icahn Enterprises.

The investment portion of the business is mainly run through what was previously Icahn’s hedge fund, but in 2011 Icahn returned outside money. This left himself and the entity Icahn Enterprises as the dominant holders.

Icahn is a big risk taker, which can be seen by the use of leverage in his fund. In the recent quarterly report, it was disclosed the fund’s long exposure was 164% of the fund’s capital and the total short position was 313%. This gives the fund a net short position of 149%. This is far above the net short position of 25% Icahn held at the end of 2015.

Icahn has been very vocal about his concerns surrounding the market. If there is a fallout, he could benefit greatly. It is also unclear what exactly he is currently shorting in his fund. This raises an area of concern, because as an investor you should want to know what he is shorting.

Last week, we discussed the idea of using a hedge on your portfolio by using an inverse correlation fund. By no means is Icahn using a hedge; he is betting that the market will fall and if it doesn’t, he could lose big time.

So far Icahn has been wrong, and that can be seen in the poor performance of his fund. In the first quarter it was down 12.8%; this follows a poor showing in 2015 when it fell by 18%.

To put this into perspective, had you invested $100,000 January 1, 2015 it would be worth approximately $71,500. 

Icahn personally owns about a 90% stake in Icahn Enterprises. This essentially gives him the rights to do as he pleases with the entity. 

While he has had a long track record of success, all the leverage he has deployed could send Icahn and his fund on a quick downward spiral if he is wrong.

Do you have a question or a company you'd like me to take a look at? Email me at Chase@WilseyAssetManagement.com!


Chase is a financial analyst for Wilsey Asset Management and can be heard every Saturday at 8 a.m. on KFMB AM760 as the co-host for the Smart Investing show with his father Brent Wilsey. Information is provided by Reuters.