Activist investor Carl Icahn is often in the news with his well-publicized investments in stocks such as Apple Inc (AAPL), Herbalife Ltd. (HLF), eBay Inc (EBAY) and other big names. Recently he was in the news as he purchased a large stake in capital goods company Manitowoc Company Inc. (MTW). Icahn will push for the company to separate its crane manufacturing and food service businesses.
Individuals can invest along with Carl Icahn through his master limited partnership, Icahn Enterprises LP (IEP). But should you? Or are there better investments out there?
Icahn Enterprises reported a net loss for its third quarter 2014 of $355 million or $2.90 per unit (the MLP equivalent of shares), on $4.4 billion revenue. This compares to the year ago quarter’s net income of $472 million, or $4.10 per unit, on revenue of $5.8 billion.
The losses were largely due to oil investments. Icahn Enterprises holds positions in energy stocks such as Chesapeake Energy Corporation (CHK), with 66 million shares, and owns more than 70 million shares of CVR Energy, Inc. (CVI), along with a large position in offshore driller Transocean LTD (RIG). Transocean is expected to take a $2.8 billion charge.
Though Carl Icahn is still a big long-term believer in oil and energy stocks, he also holds large stakes in other major companies outside of energy. The most notable one is Apple, with Icahn’s stake now estimated worth somewhere between $5 billion and $6 billion. Icahn remains a vocal bull on Apple, insisting the company is much more than a mere hardware company. He maintains Apple is “an ecosystem of hardware, software and services.”
Along with his bullishness, however, Icahn has agitated for change at Apple. Early last year, Icahn finally backed off his demand for Apple to buy back an additional $50 billion worth of its shares. Icahn had wanted the company to deploy its massive cash reserves, which stood at nearly $160 billion in 2013, for share repurchases.
The push by Icahn for Apple to buy back so much of its stock was seen by some as an attempt to interfere with Apple’s management. Others feel the $14 billion in stock buy backs that Apple did make were due to Icahn’s push and were beneficial for shareholders.
Other Active Plays
Another successful play for Carl Icahn was to get eBay to agree to spin off PayPal, despite eBay’s initially fierce resistance. Icahn’s eBay stake is now worth nearly $2.6 billion.
The most colorful investment for Icahn is probably Herbalife. His massive stake pits him famously at odds with another star activist investor, Bill Ackman. Icahn has become the company’s largest shareholder, while Ackman has denounced the company as a “pyramid scheme.”
Earnings growth at Herbalife is falling, perhaps due to the intense investment battle. Herbalife earnings are projected to decline by 5% in 2015.
As for his most recent play, Manitowoc, although sales are sluggish in its industrial division, the company has been historically resistant to a business split. Analyst opinion is divided on whether a company split would even be beneficial.
Icahn Enterprises pays a distribution which currently yields 6.6%. The stock trades at around $93 per unit, down more than 20% from its 52-week high. Carl Icahn has pointed out, though, that IEP has returned 21.5% annually since its inception in the early 2000s.
Is IEP For You?
While investors who would have bought and held onto IEP stock from the start would have made out beautifully, the stock isn’t the long-term buy-and-hold investment it appears to be. A glance at its stock chart will show most of the price appreciation is confined to a couple of years. Some will say many stable, slow boring blue-chip stocks are like that, too.
But Icahn’s approach, like so many activist investors, is to make large, volatile bets, in an aggressive or often confrontational style. Even Icahn admits sometimes the ride is bumpy.
Icahn’s thoughts about Apple’s valuation may be fair, and maybe oil will eventually rebound. But the harangue of Apple’s management on the cash deployment was excessive, and the Herbalife stake is unappealing. Herbalife may not be a pyramid scheme, but it still seems a mediocre company.
And that’s part of the problem, but also the solution for investors. Why buy IEP when you can buy, for example, your own stake in Apple? That way, you avoid Herbalife and Manitowoc, another lackluster company, at the same time.
There’s too much noise, high drama and yes, risk, with IEP. Stay away.
As of this writing, Greg Sushinsky was long AAPL.
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