Icahn Enterprises LP (IEP)’s Investment Philosophy

Icahn Enterprises LPRecently, Icahn Enterprises LP (NASDAQ:IEP), a listed diversified holding company led by famous activist investor Carl Icahn, announced its impressive first-quarter earnings results. In April, Icahn Enterprises experienced a sweet gain of almost 38%, from $54.50 per share to more than $75 per share. Should we invest alongside Carl Icahn by investing in Icahn Enterprises at its current trading price?

Icahn Enterprises’ investment philosophy

Icahn Enterprises LP (NASDAQ:IEP), founded in 1987, is a diversified holding company, investing in various industries including Automotive, Energy, Railcar, Food Packaging, and Real Estate. Interestingly, the partnership explained that its investing philosophy was to seek out undervalued companies, following the Graham & Dodd stock valuation methodology. Nevertheless, while Graham & Dodd investors often wait for the results, Icahn Enterprises LP (NASDAQ:IEP) actively involves itself in corporate actions to unlock the potential value of the target companies.

In the first quarter of 2013, it generated more than $4.57 billion in revenue, 90% higher than the first quarter of 2012. The net gain from investment activities came in at $578 million, nearly ten times higher than the $58 million investment gain in Q1 2012. The net income attributable to Icahn Enterprises LP (NASDAQ:IEP) experienced a 465% increase to $277 million, or $2.50 diluted income per LP unit. The cash distributions declared per LP unit reached $1.

Dell is worth more than $22.80 per share?

Let’s take a closer look into the investment gains in the past three months. Most of the gain was made from an increasing value in equity securities of technology and energy. Indeed, Carl Icahn has been quite active in Dell Inc. (NASDAQ:DELL) and Transocean LTD (NYSE:RIG). Dell, one of the largest global PC makers, has dropped from $14.30 per share to around $13.30 per share. The significant drop in its share price was due to the withdrawal of The Blackstone Group L.P. (NYSE:BX)’s bid for the company.

Although The Blackstone Group L.P. (NYSE:BX) believed in Dell Inc. (NASDAQ:DELL)’s strong market position, there were two reasons why Blackstone did not pursue the buyout. First, the global PC market experienced a significant decline of as much as 14%, which was considered to be inconsistent with the modest growth projection of the company’s management. Second, The Blackstone Group L.P. (NYSE:BX) saw that the financial performance of Dell has been declining. According to Blackstone, Dell revised its operating profit estimate for the full year downward, from $3.7 billion to only $3 billion.

Carl Icahn is more bullish with his $15.65 per share offer for Dell Inc. (NASDAQ:DELL). Icahn Enterprises LP (NASDAQ:IEP) currently owns around 100 million shares in the company, accounting for 6% of the total outstanding shares. Icahn suggested that Dell should pay a $9 special dividend to shareholders. He thought that Dell should be worth around $22.81 per share, including the pro-forma “stub” at around $13.81 per share (discounted cash flow analysis) and a dividend of $9 per share.

Transocean and its 7.5% potential dividend yield

In the case of Transocean LTD (NYSE:RIG), Carl Icahn has accumulated more than 20 million shares, accounting for 5.43% of the company. According to Icahn, Transocean LTD (NYSE:RIG) has lost around $11 billion in shareholder value in its two buyout deals, Aker Drilling and GlobalSantaFe. He recently mentioned that the company had wrongly timed the cyclicality of the drilling industry by acquiring low quality assets at the top of the market. Furthermore, the company had issued equity at the lowest price in eight years to pay for those overvalued deals.

On a positive note, Icahn believes that the company generated enough cash flow to maintain its strong balance sheet. He thought that the easiest way to unlock shareholders’ value is to pay dividends. He has tried to push the company to pay around $4 – $5 per share in dividend to shareholders, much superior to the current $2.24 per share dividend payment. While Transocean plans to spend around $12.5 to $14.5 billion in capital expenditure, Icahn’s plan was only $10 billion in capex spending. At $53 per share, Transocean is worth $19 billion on the market. The market values Transocean at 9.45 times EV/EBITDA. At $4 per share, the potential dividend yield would be quite juicy at 7.55%.

My Foolish take

Icahn Enterprises LP (NASDAQ:IEP) seem to be a convenient way to follow nearly all of Icahn Enterprises LP (NASDAQ:IEP)’s big ideas and investments. Investors also could follow Icahn in any individual active investments including Dell and Transocean. However, they could only be considered opportunistic opportunities on the buyout in the case of Dell and on the corporate turnaround in case of Transocean.

The article Following Icahn’s Activist Investments originally appeared on Fool.com and is written by Anh Hoang.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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