Icahn Enterprises

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 2/5

Icahn Enterprises L.P. is a diversified holding company with operations in investment, energy, automotive, food packaging, real estate, home fashion, and metals.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Icahn Enterprises is a complex conglomerate, making it challenging for investors to fully grasp its operations and financial health.

Business Overview:

  • Diversified Operations: IEP operates across a wide range of sectors, including:
    • Investment: A significant portion of IEP’s assets are allocated to investments, encompassing various securities. This segment operates a diverse portfolio and actively manages its positions, seeking opportunistic returns.
    • Energy: IEP’s energy operations are principally centered around CVR Energy and its subsidiaries. CVR is a holding company which has ownership in CVR Refining, LP. and CVR Partners, LP. CVR Refining operates oil refineries, which means refining crude oil and transforming it into refined petroleum products. CVR Partners operates fertilizer and nitrogen production plants.
    • Automotive: IEP has a significant presence in the automotive industry through its subsidiary, Icahn Automotive, which sells auto parts and other related services.
    • Food Packaging: IEP’s food packaging segment consists of companies that produce a variety of food packaging products and related services.
    • Real Estate: This segment owns, develops, and operates commercial real estate and property assets, and its related holdings.
    • Home Fashion: This segment produces and sells various home textiles, such as towels, bedding, and other household items.
    • Metals: This segment operates as a metals recycler.

  • Revenue Distribution: IEP’s revenue streams vary significantly by segment and are highly sensitive to the market conditions for commodities, energy, and automotive-related products. The investment segment does not directly generate revenue but has a big impact on its earnings due to mark to market valuations.

  • Competitive Landscape: IEP faces intense competition in every sector that it operates, which includes many large players. Most of the industries are very mature.

Financial Analysis:

  • Recent Performance: In the nine months ended September 30, 2023, IEP reported a net loss attributable to Icahn Enterprises L.P. of ($612.7 million), compared to a profit of $162.1 million for the same period in 2022. This was primarily driven by large losses in the Investment segment.

IEP’s latest quarterly reports show significant net losses, especially in the investment segment. The recent losses are mainly due to mark to market losses in its investment portfolio, as the market has not been very favorable for its positions. It is important to note that some of its energy businesses had a great quarter.

  • Revenue: Consolidated revenues for the nine months ended September 30, 2023, were $14.6 billion, compared to $11.6 billion for the same period in 2022. The increase in revenue was primarily in the Automotive and Energy segments, but the profitability of these segments was not consistent, so a portion of the revenue growth did not result in better earnings.

  • Profitability: Earnings for IEP are variable and volatile due to its dependence on multiple sources of incomes, as well as the impact of market fluctuations on its investment portfolio. The operating margin for many segments, except the energy segment, has deteriorated.

A key part of the company’s revenue is highly susceptible to market volatility, and that has an huge impact on its profitability.

  • Net Operating Profit Less Adjusted Taxes (NOPLAT): While revenues are up, the net operating profit less adjusted taxes have taken a huge hit. As per 2023 reports, many segments have seen NOPLAT decline because of increased production costs, and decreased demand.

  • Return on Invested Capital (ROIC): IEP’s return on invested capital is variable. Given the nature of the different businesses, the performance of the segments is highly variable, which makes this metric unstable.

Return on invested capital can vary greatly year to year for the investment segment, thus, this should be a big factor in whether the business can provide sustainable value.

  • Debt: IEP’s capital structure includes significant debt, which can increase its risk profile, given its reliance on borrowed funds to operate. Many new investment companies have been funded through debt.

  • Capital Requirements: IEP requires a large amount of capital to operate its business lines. As mentioned earlier, it has a very diverse portfolio of businesses. Most of the companies have very high capex and a long runway, for which a large amount of capital is required.

Moat Analysis:

IEP does not have a strong moat. Here’s the justification for a 2/5 rating:

  • Intangible Assets: Some parts of the business benefit from brand recognition (Automotive). However, these are not the sole factors that can establish a moat, and the brand name is not enough to generate significant sustainable profit in a competitive market. Additionally, other segments are in more commoditized industries.
  • Switching Costs: Switching costs for its customers are very low. Most of IEP’s products are commodity based, so the customer can easily switch for a competitor at a better price. Some exceptions are present, like the software business within the company that does have some stickiness.
  • Network Effects: There is no major network effect in IEP’s businesses. The network effect is usually present in services that connect different parties, this is largely not applicable here.
  • Cost Advantages: Some companies in IEP’s portfolio have cost advantages due to location. But these cost advantages are not sustainable because of regional market conditions.

Moat Risks and Resilience

The biggest risk for IEP is that it has several different business and each business can fail. Some of the business segments are also very reliant on market conditions and can be very volatile.

  • Market Fluctuations: IEP’s investment portfolio is highly vulnerable to fluctuations in market valuations, because it is comprised of very liquid assets which are subject to market volatility. Changes in market sentiment and investor expectations can also lead to changes in the company’s value.
  • Economic Cycles: Certain segments of IEP are tied to the state of the larger economy. For example, automotive and real estate perform poorly when the larger economy is experiencing a downturn. This is a serious risk because some of the companies can have a downturn due to no fault of their own but due to overall economic conditions.
  • Competitive Pressure: IEP operates in competitive industries, and if its cost advantages fail, its profitability can take a major hit. Because of competition, most of its businesses cannot be certain about their futures, even when they are performing well, as new entrants might make a push to compete with them.
  • Integration Risks: IEP has a lot of acquisitions within its company, and integrating all these businesses may be a difficult process, and these acquisitions may not be as profitable as they initially seem.
  • Operational Risk: The company needs to manage numerous operations across different industries. If these processes are not streamlined, they can lead to inefficiencies and other operational issues, negatively affecting the financials of the company.

Management’s ability to maintain profitability across many diverse businesses is a key factor in its resilience, but if the markets turn unfavorably, they can pose a major challenge to the company’s financial health.

Understandability Rating: 4/5

IEP’s conglomerate structure makes it difficult to understand all aspects of its business. While each segment is not too complicated, the way different businesses interact and the overall picture of the company can be overwhelming. However, the company does provide granular detail of each segments which, helps to form a better picture.

Balance Sheet Health: 2/5

The current state of IEP’s balance sheet is not very healthy, and is a cause of concern.

  • High Debt Level: IEP has a high debt-to-capital ratio, which may make it hard for the company to grow consistently in the future.
  • Low Cash and Equivalents: IEP has low cash reserves and can be considered a capital-intensive business. This means the company is highly reliant on external financing.
  • High Non-Operating Assets: A large portion of the company’s assets consists of non-operating assets (related to investments), which makes it difficult to understand the actual strength of its business. The book value and the valuation of these assets can vary and cause large swings in the value of the company.

Recent Concerns / Controversies and Problems:

  • Activist Investor Pressure: Carl Icahn has faced criticism and has often been criticized for some decisions relating to his investments. In the past, some of the companies which were under control of Carl Icahn have performed poorly, which can have a significant impact on the public’s faith in the company. There are also a few lawsuits against the company by the Securities and Exchange Commission.
  • Investment Portfolio Performance: IEP’s investment segment has faced huge losses. This segment is highly dependent on market sentiment, so these losses can continue in the future.
  • Dividend Cuts: The company has cut its dividend payouts due to poor performance. This will decrease the attractiveness of the company to shareholders.

Management acknowledged the poor performance but is confident in its long term prospects. However, there is some skepticism among shareholders.