Carl Icahn has been in the news recently. The 77-year-old billionaire investor’s recent flurry of activist and aggressive investing activity has seen the previously unknown investor suddenly come to the forefront in the investing world. Indeed, some market commentators have actually claimed that thanks to his recent outperformance, Icahn could actually be a better investor than the Oracle of Omaha, Warren Buffett himself.
Personally, I believe Icahn is not comparable to Buffett for the reasons set out here, but the jewels of Icahn’s portfolio are not limited to the likes of Apple and Dell.
A turnaround play
For a start, the Icahn portfolio contains beaten-down Transocean LTD (NYSE:RIG), a company that has transformed itself over the past two years. It has divested noncore assets, improved operational efficiency, and focused on ultra-deepwater markets, which are set to see rapid growth over the next few years. In particular, Transocean noted an improvement of operational efficiency from 89.6% at the beginning of 2012 to 94.7% by year-end.
However, what really excites me about Transocean is the company’s predicted growth, valuation in relation to book value, and dividend payments — currently some of the best in sector. According to some analysts’ estimates, Transocean’s revenue is set to grow 10% to 11% throughout 2013 and 2014 before slowing to 4% during 2015.
Meanwhile, earnings before interest, taxes, depreciation, and amortization are expected to expand 26% annually for the next three years. As efficiencies are worked through, the company’s operating profit margin is set to grow from 2012’s level of 18.3% to 35% during 2015. Fully diluted earnings per share are expected to be around $7.55 by 2015.
I have also mentioned that the company’s book value looks attractive. Currently trading at a price-to-book ratio of 1.1, Transocean looks cheap compared to similar-sized peer SeaDrill, which trades at a price-to-book ratio of three.
The one factor that previously hung over Transocean was its Macondo-related liabilities. However, the recent $1.4 billion settlement with the U.S. Department of Justice payable over five years is the first step to a resolution and puts the company on solid footing to look beyond Macondo.
A play on the U.S. oil boom
The other jewel in Icahn’s portfolio is American Railcar Industries, Inc. (NASDAQ:ARII).
The oil boom within the U.S. has created a transport problem. Bottlenecks and political wrangling have slowed down the transport of crude by pipeline. In addition, many pipelines do not reach the regions required, leaving producers with only one other option for transportation: rail.
This is where American Railcar steps in. The company not only manufactures railcars and tanker cars to sell, but it also manufactures railcars for lease — a lucrative business. Railcar leases are usually signed for five to seven years, which locks in cash flow. Moreover, these leases are highly cash-generative, and during the second quarter, the company’s leased railcars generated a 10% annualized return on total assets.
Having said that, only 5% of American’s revenue currently comes from the leasing of railcars and tankers. Nonetheless, the company is reinvesting all profit in its leasing fleet, which is set to expand 89% over the next few quarters, according to orders the company has in place. This doubling of the rental fleet should boost total revenue by 7.5% and almost double recurring revenue. Moreover, as the rental fleet’s construction is funded from cash on hand, any profit over the next few years goes straight to the bottom line.