Icahn Enterprises L.P. IEP shares had their worst trading day since October 2002, falling almost 20% on Tuesday following the release of an extremely negative report by short seller Hindenberg Research.
Hindenburg Research alleged in a study titled “Icahn Enterprises: The Corporate Raider Throwing Stones From His Own Glass House” that the company in which the famous activist investor Carl Icahn holds 85% of its shares follows a Ponzi Scheme structure and is enormously overpriced.
In reaction to the report, Icahn Enterprises’ stock price has dropped to its lowest point since March 2020 when Covid-19 struck.
Benzinga reached out to Icahn Enterprises for a statement regarding the short report and is currently awaiting their reply.
Chart: Icahn Enterprises Shares Plummets To March 2020’s Lows On The Worst Day In Two Decades
The Hindenburg Research Report On Icahn Enterprises Has Five Key Takeaways For Investors:
1) Icahn Enterprises Is Highly Overvalued Relative to Its Net Asset Value
Hindenburg Research revealed that the total investment value of Icahn Enterprises’ corporate assets were either plainly inflated due to losses not yet included in the most recent 2022 year-end NAV calculation or blatantly overvalued due to evident overestimation of less liquid assets.
According to the short seller, among the 526 U.S.-based CEFs in Bloomberg’s database, IEP trades at a stunning 218% premium to its latest reported NAV. This is more than double the next largest premium they identified.
2) Competitors Trade At Around Or At A Discount To Their NAVs
According to Hindenburg Research, Icahn Enterprises’ main rivals, Third Point and Pershing Square, trade at discounts of 14% and 35% to NAV, respectively.
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3) A Ponzi Scheme Lies Beneath The Outrageously High Dividends
Among U.S. large companies, Icahn Enterprises has the highest dividend yield, at about 15.8%. According to Hindenburg Research, such a high payout is made possible because Carl Icahn controls around 85% of IEP and has been taking dividends in units (rather than cash), decreasing the overall cash expenditure necessary to satisfy the dividend payment to other unitholders. Since 2019, the company has had to raise a total of $1.7 billion through the open market sale of IEP units in order to maintain its dividend.
In a nutshell, Icahn has been paying dividends to existing shareholders out of money he has raised from new investors, by using a Ponzi-scheme structure, Hindenburg Research says.
4) One Sell Side Research Covering IEP Has Tight Relationships With Carl Icahn
The sole significant investment bank covering Icahn Enterprises, Jefferies Financial Group JEF, has consistently given IEP units a “Buy” recommendation and thinks the dividends to be secure “in perpetuity.”
Over the years, the current CEO of Jefferies, Richard Handler, has maintained a close relationship with Carl Icahn. Icahn assisted Jefferies during the global financial crisis, according to a 2014 article, and Jefferies looks to be repaying the favor.
5) A Significant Lack of Transparency Exists Underneath Icahn Enterprises’ Metrics
Unitholders have not received critical information on the health of Icahn Enterprises. Icahn has not revealed his margin loans, such as loan to value (LTV), maintenance thresholds, principal amount, or interest rates.
In January 2020, UBS analyst Brennan Hawken cited Icahn’s lack of transparency among the key reasons for dropping coverage.
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