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Icahn Enterprises (NASDAQ:IEP) last declared a quarterly distribution of $1 per unit, down 50% from its prior distribution, and currently yields a 20% annual forward yield. The safest yield is certainly one that has just been cut and the IEP, founded by famed activist investor and corporate raider Carl Icahn, calls for a 61% decline in its valuation since early 2023, the first of 22 consecutive Fed funds rate hikes. Have seen The high of 5.25% to 5.50% is aggregated with a significant short report from Hindenburg Research in May. It’s been four months since ‘The Corporate Raider Throwing Stones from His Own Glass House’ was published and even with rightsized distribution, uncertainty still looms over investing in Icahn Enterprises.
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However, the company is making losses. It posted a double miss in its most recent fiscal 2023 second quarter, which saw a 28.6% year-on-year revenue decline and material weakness in net income. Worryingly for unitholders, short interest remains sticky even after the company retries taking into account further cut in dividend and return of units to NAV. Seriously, if these two scenarios were to occur, the current year-to-date decline is looking like a good time. Earnings are the prize, and investors seeking stability have been turned upside down by the chaos generated by the brief May report. The resonance of this report has necessitated another look at the ticker. The current yield is currently well above its historic pre-Hindenburg level and the 10-year US Treasury yield currently stands at 4.18% in contrast.
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Provides support of constant premium to NAV
A prolonged high spell from the Fed could spell trouble for the company, which had total debt of $7.08 billion at the end of the second quarter. For context, Icahn Enterprises’ current market capitalization is $7.96 billion and it had quarterly interest expense of $136 million during its second quarter. The group is structured as a Delaware Master Limited Partnership and operates in various sectors such as energy, investments, pharmaceuticals, automotive, home fashion, food packaging and real estate. The company owns Pep Boys and Visquez. Its second quarter revenue was $2.5 billion, down 28.6% from last year and $540 million below consensus estimates.
Icahn Enterprises Fiscal 2023 Second Quarter Earnings Presentation
Net income for the quarter was negative $269 million, approximately $0.72 per unit, and an increase from a loss of $128 million in the year-ago period, approximately $0.41 per unit. Bulls found it hard to defend in the report, with Icahn Enterprises reporting a net asset value of $5 billion, roughly $13.62 per unit. This was a decline of 10.7% from the $5.6 billion expected by the end of 2022. This NAV is a non-GAAP measure and is set against units currently changing hands for $20.22 per unit. Therefore, bears who have received a heavy dose of schadenfreude following Icahn’s high-profile battles as corporate raiders from Herbalife (HLF) to Cheniere Energy (LNG) could very well benefit from an already deteriorating situation. Are.
Investments may recover as Fed holds off on further rate hikes
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To be clear, if Icahn Enterprises were to trade at exactly its NAV per unit, its valuation would drop 32.6% from its current level. That’s when its rapidly growing unit count will result in a decline in NAV per unit if the earnings weakness continues. Indeed, adjusted EBITDA of $34 million in the second quarter fell 73% from $126 million a year ago. However, if the US macroeconomic environment worsens, the company may find it difficult to recover. The Fed is likely to hike rates further and the market is currently pricing in a 94% chance that interest rates will remain unchanged at the September 20 FOMC meeting.
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That’s up from an 80% chance a week earlier based on jobs data, in which unemployment rose to 3.8%. Therefore, a Goldilocks economic scenario could emerge where the US economy experiences a soft landing and inflation returns to the Fed’s 2% target. The rate freeze has further worsened in September as student loan repayments resumed in October after a moratorium that lasted a little over three and a half years. Therefore, any such softening stance could boost the group’s weak investment segment, which lost $215 million during the second quarter.
Icahn Enterprises Fiscal 2023 Second Quarter Earnings Form 10-Q
Any euphoria may be short-lived as the Fed’s prolonged higher spell of pause is likely to come into focus. Icahn Enterprises also disclosed that it is subject to an SEC investigation with the regulator seeking information related to the securities offering, corporate governance, capitalization and marketing materials, among other materials. While this is likely just a process, it carries the risk of uncertainty still looming large over investment in the group as $1.1 billion of senior unsecured notes attached to the holding company come due next year. Icahn Enterprises will likely have to refinance at rates higher than the current 4.75% coupon. Could there be other downsides to this? Perhaps. But the broader market looks set for a rally in the next few months as the Fed looks to open a new chapter with interest rates.
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