Like him or hate him, Carl Icahn has built a multi-billion dollar fortune based on an ability to discern value and an unwavering dedication to realizing the desired results for himself and his partners. While his earlier methods were somewhat dubious, Mr. Icahn’s recent activities are indicative of a long-term strategy. Indeed, he returned outside partners’ money and folded his funds into publicly-traded Icahn Enterprises LP (NASDAQ:IEP) back in 2011. So, which sectors hold his attention in the current market environment?
Icahn Enterprises holds a controlling stake in Federal-Mogul Corporation (NASDAQ:FDML), a leading supplier of system components to the global automobile industry. The company also manufactures a diverse variety of parts for the aftermarket segment, including brake and chassis components. Despite rising domestic new vehicle sales over the past two years, Federal-Mogul’s sales have been flat due to improved vehicle quality and lower demand for aftermarket parts.
In FY2012, Federal-Mogul reported weak financial results, with decreases in revenue and adjusted operating income of 3.6% and 29.3%, respectively, versus the prior year. The company’s weak profitability was caused by production volume declines in various international markets, as well as a shift to lower margin products. The European market, in particular, has increasingly moved from diesel-powered vehicles to cheaper, gasoline-powered vehicles, a shift that has led to a lower profit margin for Federal Mogul (NASDAQ:FDML)’s powertrain business.
Looking ahead, the company continues to build its aftermarket parts business, which is less susceptible to the cyclical nature of the auto business. Federal-Mogul also recently initiated a restructuring plan to improve results in its original equipment manufacturing business, which will likely result in eliminating unprofitable product lines and downsizing its facilities. Despite Federal-Mogul’s steep stock price decline over the past year, Icahn Enterprises continues to add to its investment, as it believes in the favorable, long-term fundamentals of the global auto business.
Icahn Enterprises engaged in a proxy fight and tender offer at CVR Energy, Inc. (NYSE:CVI), ultimately gaining control of the company and building its stake to the current level of 82%. CVR Energy, Inc. (NYSE:CVI) is a major Midwest refiner and distributor of petroleum products, as well a manufacturer of nitrogen-based fertilizers. The company has been a beneficiary of a much-improved refining margin over the past two years, as gasoline prices have posted gains, in line with a rebound in global transportation activity.
In FY2012, CVR Energy, Inc. (NYSE:CVI) reported very strong financial results, with increases in revenue and operating income of 70.4% and 82.7%, respectively, compared to the prior year. The company’s sales growth benefited from a 75% increase in production, due to its purchase of the Wynnewood refinery, as well as moderately higher sales prices. In addition, CVR Energy’s operating margin rose as a result of a higher refining margin and greater efficiencies across its distribution network.
Looking ahead, the company is forecasting future growth in both its petroleum and fertilizer businesses, as global economic growth continues to grind slowly higher. CVR Energy, Inc. (NYSE:CVI)’s fertilizer plant is the newest facility based in the U.S. and should benefit from continuously higher demand for fertilizers around the world. With the February 2013 completion of a 50% capacity upgrade to its fertilizer plant and strong cash flow generation, CVR Energy, Inc. (NYSE:CVI) is poised to deliver rising shareholder value.
Icahn Enterprises has had a controlling interest in American Railcar Industries, Inc. (NASDAQ:ARII) for a number of years, a sector that has also been a focus for Warren Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A). American Railcar is a leading manufacturer of hopper and tank railcars, as well as providing fleet management and leasing services to the rail industry. While railcar orders cratered during the financial crisis, orders rebounded in 2011 and 2012 as railroads purchased new cars and performed delayed maintenance on their existing fleets.
In FY2012, American Railcar generated strong financial results, with increases in revenue and operating income of 37.0% and 270.2%, respectively, versus the prior year. The company gained from a double-digit increase in external order shipments, as well as the creation of a captive leasing subsidiary. Given the railroad industry’s propensity to lease their railcars, American Railcar decided to put its excess cash to productive use and take some of the high-margin leasing income that banks had been generating.
Looking forward, American Railcar is expecting future profit growth based on a solid backlog of orders and good fundamentals for the nation’s railroad industry. The company has also reduced its profit variability with the creation of a finance business, which should help to smooth its financial results throughout the industry’s business cycle. With the railroad industry’s fuel efficiency advantage, business should remain strong for the foreseeable future.
Investors need to watch Carl Icahn’s moves, given his position size and successful track record at creating value in his stock investments. While Federal Mogul is a work in process, CVR Energy, Inc. (NYSE:CVI) and American Railcar are industry leaders that belong in investors’ portfolios.
The article Riding on Mr. Icahn’s Coattails originally appeared on Fool.com and is written by and is written by Robert Hanley.
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