Short-seller Hindenburg Research has been relentless this year. Along with publishing sensational reports of alleged wrongdoings at India's Adani Group and U.S. fintech pioneer Block (SQ), Hindenburg also set its sights on Icahn Enterprises (IEP), led by famed activist investor Carl Icahn.
Since Hindenburg released a report accusing IEP of “inflated” asset valuations and alleging that its high dividend yield is “unsupported” by its cash flow and investment performance, the stock has taken a severe beating this year. Unfortunately for income investors, Icahn Enterprises responded by cutting its dividend - which sent the shares reeling even lower.
But is IEP a value pickup for income investors, or the ultimate yield trap? Let's take a look.
About Icahn Enterprises
Icahn gained notoriety in the '80s by acquiring a controlling stake in Trans World Airlines. He turned around the company and sold it for a significant profit. Since then, he has carried out such “corporate raids” on a number of companies - including Revlon, Pep Boys, Federal-Mogul, and PSC Metals, among others.
In 1987, he founded Icahn Enterprises, a diversified holding company engaged in seven primary business segments: Investment, Energy, Automotive, Food Packaging, Real Estate, Home Fashion, and Pharma. Icahn himself owns more than 80% share of the company.
Following the steep decline in the share price, the forward dividend yield on IEP now stands at a whopping 23%. Meanwhile, the stock is down 66.7% on a YTD basis.
Weak Financials Spark a Dividend Cut
Icahn Enterprises posted an abysmal set of numbers for its latest quarter on Nov. 3. Revenues slipped by 10.3% from the previous year to $2.9 billion. Losses narrowed to $0.01 per share, while adjusted EPS of $0.09 missed the consensus estimate of $0.34 by a wide margin.
On an annual basis, Icahn Enterprises has reported negative net income for five years in a row, and seven times over the past 10 years.
IEP's high debt levels and lack of sufficient available liquidity are also cause for concern. For the quarter ended Sept. 30, the company carried a debt load of $7.1 billion on its balance sheet - much higher than the cash balance of $2.9 billion, and slightly higher than its current market cap, as well.
Looking ahead, senior unsecured notes worth $1.10 billion and $749 million are set to mature in 2024 and 2025, respectively.
Is IEP Trading Above NAV?
Despite the huge drop in its share price, there are some indications the stock remains overvalued at current levels.
Icahn Enterprises reported that, “Indicative net asset value decreased to $5.0 billion as of June 30, 2023 compared to $5.6 billion as of December 31, 2022,” but Hindenburg alleges that year-end figure was inflated by more than 22%.
IEP appears to be valued around $14-$15 per share based on net asset value (NAV), but the shares continue to trade at a premium to that level. Plus, the potential for additional IEP unit issuances could further dilute share value.
Limited Analyst Coverage
IEP does not have substantial analyst coverage. Notably, just one analyst covers the stock, with a “Strong Buy” rating and a mean target price of $26. This denotes an upside potential of about 51.2% from current levels.
However, given the limited coverage and significant concerns over IEP's liquidity position, it would likely be a wise move for investors not to put too much weight on this singular analyst opinion.
On the date of publication, Pathikrit Bose did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
