Daniel A. Ninivaggi, Chief Executive Officer of Icahn Enterprises said in the latest earnings call last Friday May 3rd that: “At the holding company level, we completed a public equity offering of IEP units in the first quarter. We also adopted a $4 annual dividend policy, resulting in a very attractive yield to our unitholders. Providing additional liquidity in IEP units and our new dividend policy are part of our strategy to broaden and strengthen our shareholder base. We also believe creating more liquidity in IEP units will provide us more financial flexibility to pursue our activist strategy and make it even more effective.” Carl C. Icahn, Chairman of the Board for Icahn Enterprises is well known for his activist stance. Icahn Enterprises LP (NASDAQ:IEP) shares yesterday were up by over 4% and are again up today.
IEP Share Price Performance Relative to Peers
It should be noted that our Corporate Actions Report on Icahn Enterprises suggested that the fundamentals did not support an increase in dividends. Our preliminary analysis indicates that the new dividend policy is supported primarily by financing activities i.e. issuance of new equity. An updated Dividend Quality Report in which we assess whether dividends are being paid from operating, investing or issuance cash flows and whether the beginning cash balance is needed to make this payment will be out shortly for Capitalcube subscribers.
We analyzed the first quarter earnings for Icahn Enterprises LP (NASDAQ:IEP) using our proprietary peer-based methodology. Our analysis is based on the company’s performance over the last twelve months (unless stated otherwise). For a more detailed analysis of this company (and over 40,000 other global equities) please visit www.capitalcube.com. We also examine the Accounting Quality of NASDAQ:IEP and conclude that the company’s financials suggest possible sandbagging of net income.
IEP Accounting Quality Relative to Peers
We used the following peer-set for analyzing Icahn Enterprises: C. P. Pokphand Co. Ltd. (OTCMKTS:CPKPY) (HKG:0043), Mitsubishi Corporation (OTCMKTS:MSBHY), Mitsui & Co Ltd (OTCMKTS:MITSY), Itochu Corp (OTCMKTS:ITOCY) (TYO:8001), SEGA SAMMY HOLDINGS INC. (OTCMKTS:SGAMY), Vesuvius PLC (LON:CKSN), ALFA S.A.B. DE C.V. (OTCMKTS:ALFFF), AutoZone, Inc. (NYSE:AZO), O’Reilly Automotive Inc (NASDAQ:ORLY) and Advance Auto Parts, Inc. (NYSE:AAP). Capitalcube users can customize this peer set and instantly generate a new report relative to the new peers.
The table below shows the preliminary results along with the recent trend for revenues, net income and returns
|Quarterly (USD million)||2013-03-31||2012-12-31||2012-09-30||2012-06-30||2012-03-31|
|Revenue Growth %||11.3||(8.5)||11.1||57.2||(16.4)|
|Net Income Growth %||1,405.6||(76.9)||(66.8)||389.6||(81.2)|
|Net Margin %||5.7||0.4||1.7||5.6||1.8|
|ROE % (Annualized)||21.2||1.5||6.4||19.9||4.4|
|ROA % (Annualized)||4.3||0.3||1.3||4.2||0.8|
IEP Revenues Trend
IEP Net Margin Trend
Icahn Enterprises LP (NASDAQ:IEP) trades at a lower Price/Book multiple (1.5) than its peer median (3.7). The market expects IEP-US to grow at about the same rate as its chosen peers (PE of 13.4 compared to peer median of 14.8) and to maintain the peer median return (ROE of 12.1%) it currently generates.
The company’s profit margins are below peer median (currently 3.4% vs. peer median of 6.2%) while its asset efficiency is about median (asset turns of 0.8x compared to peer median of 0.8x). IEP-US’s net margin is greater than (but within one standard deviation of) its four-year average net margin of 1.2%.
The company has achieved better revenues growth than its chosen peers (year-on-year change in revenues of 32.8%) but its earnings growth performance has been below the median (change in annual reported earnings of -48.4% compared to the peer median of 9.6%). This suggests that, compared to its peers, the company is focused more on top-line revenues. IEP-US is currently converting every 1% of change in revenue into -1.5% change in annual reported earnings.
IEP-US’s return on assets is less than its peer median currently (2.5% vs. peer median 4.4%). It has also had less than peer median returns on assets over the past five years (0.7% vs. peer median 3.5%). This performance suggests that the company has persistent operating challenges relative to peers.
The company’s gross margin of 20.2% is around peer median suggesting that IEP-US’s operations do not benefit from any differentiating pricing advantage. However, IEP-US’s pre-tax margin is more than the peer median (7.8% compared to 6.3%) suggesting relatively tight control on operating costs.
Growth & Investment Strategy
While IEP-US’s revenues have grown faster than the peer median (26.9% vs. 7.7% respectively for the past three years), the market gives the stock an about peer median PE ratio of 13.4. This suggests that the market has some questions about the company’s long-term strategy.
IEP-US’s annualized rate of change in capital of 23.0% over the past three years is greater than the peer median of 10.4%. This relatively high investment has generated a less than peer median return on capital of 4.2% averaged over the same three years. The relatively high investment and low current returns lead us to believe that the company is betting heavily on the future.
IEP-US reported relatively weak net income margins for the last twelve months (3.4% vs. peer median of 6.2%). This weak margin performance and relatively conservative accrual policy (5.0% vs. peer median of 4.1%) suggest the company might likely be understating its net income, possibly to the extent that there might even be some sandbagging of the reported net income numbers.
IEP-US’s accruals over the last twelve months are positive suggesting a buildup of reserves. In addition, the level of accrual is greater than the peer median — which suggests a relatively strong buildup in reserves compared to its peers.
Icahn Enterprises LP (NASDAQ:IEP) is a holding company, which through its subsidiaries, engaged in nine primary business segments: Investment, Automotive, Energy, Gaming, Railcar, Food Packaging, Metals, Real Estate and Home Fashion. The Investment segment is comprised of various private investment funds, including Icahn Partners LP, Icahn Partners Master Fund LP, Icahn Partners Master Fund II LP and Icahn Partners Master Fund III LP. The Automotive segment holds ownership in Federal-Mogul Corp., which is a supplier to the automotive, aerospace, energy, heavy duty truck, industrial, marine, power generation and railway industries. The Energy segment holds ownership in CVR Energy, Inc., which owns majority interests in two separate operating subsidiaries, CVR Refining, LP (“”CVRR””) and CVR Partners, LP (“”CVRP””). The CVRR is an independent petroleum refiner and marketer of high-value transportation fuels in the mid-continent of the U.S. The CVRP is a nitrogen fertilizer producer in the heart of the Corn Belt. The Gaming segment holds ownership in Tropicana Entertainment Inc., which owns and operates a diversified, multi-jurisdictional collection of casino gaming properties. The Railcar segment holds ownership in American Railcar Industries Inc., which is a manufacturer of hopper and tank railcars. It provides fleet management, maintenance, engineering and field services. The American Railcar Industries services include maintenance planning, project management, tracking and tracing, regulatory compliance, mileage audit, rolling stock taxes and online service access. The Food Packaging segment holds ownership in Viskase Cos., Inc., which is engaged in production and sale of cellulosic, fibrous and plastic casings for the processed meat and poultry industry. The Metals segment operates through company indirect wholly owned subsidiary, PSC Metals, Inc., which is a one of the independent metal recycling companies in the U.S. and collects industrial and obsolete scrap metal, processes it into reusable forms and supplies the recycled metals to its customers including electric-arc furnace mills, integrated steel mills, foundries, secondary smelters and metals brokers. The Real Estate segment consists of rental real estate, property development and resort activities. The Home Fashion segment operates through company indirect wholly owned subsidiary WestPoint Home LLC, which a manufacturer and distributor of home fashion consumer products. The WestPoint Home is engaged in the business of manufacturing, sourcing, designing, marketing, distributing and selling home fashion consumer products. It markets a broad range of manufactured and sourced bed, bath and basic bedding products, including, sheets, pillowcases, bedspreads, quilts, comforters and duvet covers, feather beds, bath and beach towels, bath accessories, bed skirts, bed pillows, flocked blankets, woven blankets and throws, and mattress pads. The company was founded on February 17, 1987 and is headquartered in New York, NY.
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