Short IEP into 3Q and potentially 4Q earnings releases

Thesis

IEP’s NAV is set to be written down materially in 3Q and potentially in 4Q as its investments in public companies (as well as comps for its private investments) have declined substantially since the end of 2Q, while IEP shares have held in there. The opportunity exists because the stock is mostly owned by retail and is off the radar for most institutional investors. When investors learn of the significant decline in NAV, the stock should follow suit. The stock is worth 1.1x NAV or $79.82, 20% below the current stock price.

Carl Icahn is one of the most impressive (and entertaining) investors of our time. This is not an indictment of his incredible track record but a trade into year end as retail investors realize the degradation of NAV. In fact, I would love the opportunity to get long IEP closer to NAV.

Company Overview

Icahn Enterprises L.P. (Ticker: IEP"), Carl Icahn’s publicly traded investment vehicle, is a diversified holding company with operating segments in Investment, Automotive, Energy, Gaming, Railcar, Food Packaging, Metals, Real Estate and Home Fashion. The company was originally formed in 1987 as an MLP and Carl Icahn continues to control the company, owning 88% of IEP’s outstanding units.

Net Asset Value to be Revalued Down 16%

I estimate IEP’s NAV/unit has declined 16% to $72.57 pro-forma today from $86.19 at 2Q14. I assume the investment fund is down 4.5% since the end of 2Q14 (weighted average total return on public longs are a loss of 13.2%, the net exposure was 39% at 2Q, Icahn stated he was shorting the SPY as recently as last week) and marked to market the public control investments. Further, I am assuming there is no change in the values of the public comp set used to value the private portfolio.

The company has $5.5bn of holding company debt, which is a double edged sword. It’s helpful for when investment values are rising. When investments are declining in value as they have, it obviously causes NAV to decline more quickly.

Sources: Company filings and Bloomberg.

Holding Company Investment in Funds (IEP’s investment in Icahn’s HF)

I’m not going to spend much time explaining the strategy as I am assuming everyone is familiar with his activist approach. As of 2Q14, the fund’s net notional exposure was 39%. As recently as last week, Carl Icahn stated he was buying “quite a bit of hedges” and in particular said he was shorting the S&P 500 index (http://www.cnbc.com/id/102075405).

IEP has invested $5.1bn into the fund as of 2Q14. The market focuses on Icahn’s massive stake in AAPL, up a healthy 7.9% since 2Q14 and his recent success in EBAY, up 0.8% since 2Q14. The real story has been the declines in Chesapeake Energy (-38.9% since 2Q14), Hertz Global Holdings (-30.9%), Nuance Communications (-25.3%), Herbalife (-32.1%), Transocean (-34.5%), and Talisman Energy (-33.0%). On a weighted average basis, I calculate that Icahn’s long only portfolio was down 13.2% since 2Q14.

Note: % changes are a total return basis

Icahn’s Long Only Portfolio Per 13F

Source: Bloomberg.

Top Positions: Total Return Since 2Q14

CVR Energy (Ticker: CVI)

$29.08/Unit at 2Q14 or 34% of NAV

Federal Mogul (Ticker: FDML)

$20.76/Unit at 2Q14 or 24% of NAV

American Railcar Industry (Ticker: ARII)

$6.82/Unit at 2Q14 or 8% of NAV

Shareholder Base

IEP has no institutional ownership base, which is both good and bad for the thesis. If investors don’t realize NAV declined, the thesis may not work. My hope is that selling begets selling when they see the NAV declined and the stock trades down to NAV.

Risks

• Nobody cares that NAV declined
• Equity markets / underlying portfolio investments rise (can be partially hedged)

• 3Q and potentially 4Q earnings releases