Besides Netflix (NFLX), What Else Has Carl Icahn Shown Confidence In?

ICAHN CAPITAL LPCarl Icahn, the infamous corporate raider, made a splash toward the end of the third quarter by deciding to take on Netflix, Inc. (NASDAQ:NFLX). Other than Netflix, Icahn flew under the radar with a few modest increases in other stocks he owned at the end of 2Q.  Icahn’s big move was a 7.5% stake in the natural gas company Chesapeake Energy. Chesapeake is down almost 8% since the end of 2Q.

Icahn’s total position in Netflix represents a 10% ownership in the video streaming company. Netflix is up over 30% since the end of October, and now trades over 100x earnings. The next layer of growth for Netflix is expected to come via international subscribers, with total subscriptions in this space growing from 26.2 million in 2011 to 34.7 million in 2012 and 43.6 million in 2013. This impressive subscriber growth is only expected to translate into revenue growth of 14% in both 2012 and 2013. One other key headwind is that as Netflix embarks on international expansion, operating margins are sure to contract as greater investments are made in content and marketing.

EPS growth is expected to be down almost 100% in 2012 from 2011, and 2013 is expected rebound in growth by only 13%. We see the best-case scenario for Netflix investors if Icahn puts enough pressure on management to seek a sale to a larger tech company.

Icahn increased his 2Q Federal-Mogul Corporation (NASDAQ:FDML) only modestly, at 300,000 shares or a mere 0.5% increase. Federal-Mogul is a manufacturer of parts and components for various auto and heavy duty industrial markets. Federal-Mogul has missed earnings for each of the of the last three quarters and should see full-year EPS down 60% from 2011.

The industrial company is down over 50% year to date, but Icahn continues to be a believer, and for good reason. Federal-Mogul currently trades at an incalculable P/E, but only 7x forward earnings, where key competitors American Axle & Manufacturing and Drew Industries trade at 9x or higher. Federal-Mogul should be able to ride the expected rise in auto sales in the U.S., with light vehicle sales expected to be up from 12.7 million in 2011 to 14.4 million in 2012, and then 15.3 million in 2013. Meanwhile, Federal-Mogul is expected to grow five-year EPS by over 50% annually. Check out our other thoughts on Icahn and Federal-Mogul.

Icahn was also boosting his 2Q position in Forest Laboratories Inc. (NYSE:FRX) during 3Q to 30 million shares, a 16% increase. Forest now makes up over 9.7% of Icahn’s 13F portfolio. Icahn took a real interest in Forest at the same time he jumped into Federal-Mogul, during 2Q of 2011. Since the end of this period, Forest is down almost 20%, and the drug company has been pushed down of late on lowered 2013 guidance.

Forest expects to only earn between $0.45 – $0.60 per share next year, versus previous estimates of $0.66. Forest appears to be in a tough place right now, trading at 15x trailing earnings, but 25x forward earnings. Revenues are expected to be down 35% in 2013 due to the loss of patent protection of its antidepressant drug, which has seen a nearly 90% drop in sales this year. We would wait to see how well Forest executes on rebuilding its product portfolio before investing.

Navistar International Corp. (NYSE:NAV) was another stock that Icahn was increasing shares in during 3Q, boosting his 2Q stake by 25%. Navistar is the manufacturer of commercial trucks and engines, but trades well out of line with its peers. Navistar is trading at over 100x earnings, with the industry average being around 10x. Navistar is down almost 40% since the end of 3Q 2011, the quarter when Icahn first bought into the stock. Navistar’s EPS is expected to grow at 5% per year over the next five years.

CVR Energy, Inc. (NYSE:CVI) remained Icahn’s top equity holding – not counting Icahn Enterprises LP. Icahn held his CVR position steady during 3Q after having upped its shares in 2Q by over 450%. CVR now makes up over 18% of Icahn’s 13F portfolio. Icahn pulled his offer earlier this year to purchase the rest of CVR that he did not own, around 20% of the company. His offer was $30 per share, where the stock now trades around $39. At the time of Icahn’s offer, management remained adamant that it could unlock more value for shareholders. CVR has managed to beat EPS estimates each of the last three quarters and the energy company should grow earnings over 35% per year during the next half-decade.

We see Icahn’s investment in Netflix as a short term positive for the company, but question its long-run growth prospects. Icahn might be able to pressure Netflix into entertaining various purchase offers from the likes of Yahoo, Microsoft or Amazon, so this situation is worth monitoring. For Icahn’s other picks, Federal-Mogul has some of the best growth prospects, but Forest Labs looks to have further headwinds, along with Navistar. CVR looks to be positioned nicely, steadily increasing free cash flow and only trading 9x earnings, compared to an industry average of 16x.

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