Whatever Carl Icahn is drinking I want some! How this septuagenarian activist-investor keeps running like the Energizer bunny is what intrigues me.
According to the latest Forbes profile on Icahn he drinks Coke out of a crystal cup. Another Coke lover, like fellow iconic investor Warren Buffett. The only other similarity between Icahn and Buffett is their fondness for the rails with Icahn having held American Railcar Industries, Inc. (NASDAQ:ARII) as a long term core holding.
Surprisingly, Icahn Enterprises LP (NASDAQ:IEP) has had a much better return than Berkshire Hathaway Inc. (NYSE:BRK.A) according to Forbes, 840% to 250% respectively since 2000. Icahn Enterprises offers a 7.00% yield with a P/E of 14.54.
Two different philosophies of investing?
Both claim to be followers of Graham & Dodd investing but Icahn has a shorter time frame. Buffett has often claimed his time frame is forever.
Icahn’s recent huge buy of Herbalife is something that Buffett would likely never consider. Too much headline risk, too much short interest, and not as proven as faves like The Coca-Cola Company (NYSE:KO), International Business Machines Corp. (NYSE:IBM) and Wells Fargo & Co (NYSE:WFC), all a century old.
Icahn ‘s modus operandi is to take a stake, maybe get some board seats, and catalyze the changes he deems fit like prompting Transocean LTD (NYSE:RIG) to let loose cash in the form of a special dividend or pushing for the resignation of the CEO at Chesapeake Energy Corporation (NYSE:CHK). Both stocks rose since his involvement.
And he hasn’t always been right. Remember his stake in Lions Gate Entertainment Corp. (USA) (NYSE:LGF) that he sold off in the sevens because they weren’t changing it up fast enough for his liking? Eighteen months later it has more than tripled.
Should you ride the rails with Icahn?
Transocean LTD (NYSE:RIG) and American Railcar Industries are the most interesting Icahn stocks with traditional business models and aren’t in danger of lowered demand like Netflix, Inc. (NASDAQ:NFLX) or Dell Inc. (NASDAQ:DELL).
American Railcar Industries just made the Forbes 100 “Most Trustworthy” list as determined by GMI Ratings on 60 metrics of risk and corporate governance with an average AGR (accounting and governance risk) score of 92.
It’s a small cap, but has a yield of 2.20% at only an 8.00% payout ratio with a P/E of 15.64. It’s trading at all-time highs and is up 91% over the last year. Yet, the PEG is only .80; lower than competitors Trinity Industries, Inc. (NYSE:TRN) and Greenbrier Companies Inc (NYSE:GBX). The company operates as a subsidiary of Icahn Enterprises but based in St. Louis it’s far away from Icahn’s Manhattan aerie.
In December, Icahn and American Railcar made bids for Greenbriar Companies but was rejected… twice. American Railcar still has a higher yield than its two rivals and analysts see 15% EPS growth.
This company designs, manufactures and sells its tank and hopper railcars which carry everything from grains to chemicals to petroleum products. Forbes called it a reliable “cash cow” for Icahn. With a railcar leasing and finance arm as well as a solid business in the repair and servicing of railcars, American Railcar is poised to continue outperforming.
Drilling down with Icahn
Deepwater driller Transocean LTD (NYSE:RIG) shareholders should hope that Icahn can duplicate the magic he’s had at CVR Energy in which he took an 80% stake. The share price has risen at CVR since then unlocking even more value by Icahn’s convincing them to spin off CVR Refining in January. Icahn wants to bring the Transocean share price back to its glory days of the mid $80s before the BP/Transocean LTD (NYSE:RIG) oil spill disaster.
Icahn has a relatively small stake in Transocean but has announced plans to acquire more. Icahn’s battle with the Board for a special dividend still rages as the Board decisively recommends shareholders vote against Icahn’s proposals. Knowing Icahn, he may yet win the war.
Transocean LTD (NYSE:RIG) has a negative EPS of $0.62, but a forward P/E of 8.91. The company was one of those names that conservative companies like Edward Jones liked to recommend. It has given shareholders back over $20 billion in dividends and share repurchases, but since the April 2010 incident has had to keep money in reserve for legal claims. With a PEG at .51 it seems the market isn’t valuing its position in the drilling industry and its investment in the future with new deepwater rigs.
Analysts’ median target is $60.00 and they see 22.31% EPS growth per year over 5 years. However, the stock received two downgrades in February from Howard Weil and Deutsche Bank. Deutsche Bank’s was to a Sell.
Just buy Icahn Enterprises instead?
As a master limited partnership engaged in investment, gaming, food packaging, home fashions, railcars, auto manufacturing, metals, energy, and real estate Icahn Enterprises is certainly diversified. But if you buy Icahn Enterprises you are not just piggybacking on one or two stocks you are along for the ride with Carl himself holding 90.50% of the controls.
The stock is up 28.57% over 52 weeks. The company is not itself involved with the Ackman/Icahn vendetta over Herbalife Ltd. (NYSE:HLF). That’s Carl being Carl. Most of the company’s holdings are Buffett worthy but Icahn Enterprises does have a $2 billion position in Dell which may soon pay off for Icahn Enterprises.
One thing about piggybacking with Icahn is you will never be bored but you may have to spend more time on due diligence than with Berkshire Hathaway to keep up with Icahn’s deals.
Take a ride on the wild side
One thing about piggybacking with Icahn is you will never be bored but you may have to spend more time on due diligence than with Berkshire Hathaway to keep up with all Icahn’s deals.
I think you could quite safely piggyback on American Railcar with its higher yield and lower PEG than its rivals. Transocean LTD (NYSE:RIG) could warrant a speculative look see as well but this might take longer to see a return. If you are a true Icahn believer you might as well go with Icahn Enterprises and enjoy that 7% yield. But hold on tight, it could be a wild ride.
The article Is it Worth Piggybacking the Iconic Carl Icahn? originally appeared on Fool.com and is written by AnnaLisa Kraft.
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