Icahn Enterprises Shelling Out 66% Above Tangible Net Asset Value - What's the Justification?
Icahn Enterprises (IEP), a conglomerate with stakes across energy, auto, food packaging, and public equity, is currently trading at a market cap of approximately $5B. Despite concerns about deteriorating capital allocation and an unsustainable dividend, the company trades at a premium to its tangible book value.
The premium valuation can be attributed to several factors. Carl Icahn's influence as a well-known investor, known for value investing, might attract investors who are optimistic about his ability to create value through strategic investments and corporate activism.
Moreover, Icahn Enterprises' diversified portfolio across various sectors provides a perceived safety net against sector-specific downturns, justifying a premium valuation as investors seek stable returns across multiple industries.
Another significant factor is the dividend yield of $2.00 per share, which offers an attractive return for income-seeking investors. However, the dividend has been cut twice in the past 18 months, and currently exists because Carl Icahn takes his payouts in units rather than cash.
Analyst optimism also plays a role in the premium valuation. Some analysts have set a higher price target for IEP, indicating optimism about its future performance. For example, one analyst has a short-term price target of $12.00, suggesting a belief in the company's potential for growth and recovery.
Additionally, the stock's positive signals from moving averages indicate a favorable outlook among some technical analysts, which can influence market sentiment and lead to a premium valuation.
However, the company's financials, including recent net losses and a high dividend payout relative to earnings, pose significant challenges to sustaining its current valuation over the long term. The company's ability to address these concerns will be crucial in maintaining investor confidence and the premium valuation.
One of the key challenges lies in the auto segment, where Pep Boys, part of Icahn Automotive Group LLC, has been underperforming due to the changing automotive market and shift towards EV maintenance and more specialized service models.
Moreover, IEP's holding of Viskase, the core of its food packing sector, is valued at $115.8M as of the latest market close, which is a 50% markup over its actual market value. This discrepancy in valuation could potentially impact the company's financial health.
In conclusion, while Icahn Enterprises trades at a premium to its tangible book value, this premium may not be justified unless the company can generate real operating wins or fix its capital allocation problem. The company's recent financial performance and the performance of its key holdings, such as Viskase and Carl Icahn's latest plays (JetBlue, Illumina, and Southwest Gas), suggest that there are significant challenges to overcome. The company's ability to address these challenges will be crucial in maintaining investor confidence and the premium valuation.
Investors might find value in Icahn Enterprises' business due to Carl Icahn's reputation as a value investor, the company's diversified portfolio, and an attractive dividend yield, despite concerns about capital allocation and financial performance. However, addressing these issues, particularly in the auto segment and the valuation of key holdings, is essential to maintain investor confidence and justify the premium valuation long-term.
