2 Stocks You Should Invest In From Icahn's Wins
Madhukar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
For now, it seems Bill Ackman is getting the better of fellow activist investor Carl Icahn. After the recent smackdown on CNBC between both billionaire investors over Herbalife (NYSE: HLF), the stock observed a decline of ~20% in the last 20 days. I think the “zero target” that Ackman presented initially is impossible unless the government intervenes and shuts this company down. Icahn, on the other hand, won’t confirm if he owns any shares in Herbalife. According to the Wall Street Journal, he made a small position in this stock at the same time as Loeb. Looking from an investing perspective, I would not advise investing in Herbalife for now as the billionaires’ ego clashes are making it a battleground stock.
Speaking of Carl Icahn, this investor has shown active interest in oil and energy stocks. About 32% of his portfolio is dedicated to this sector. This year, he invested in Transocean Limited following his last year's investment in Chesapeake Energy Corporation and CVR Energy Incorporated. I have picked up three stocks in which Carl holds significant positions, and all three of them look strong with their long term fundamentals intact. Two of them belong to the basic materials sector, and the third is a company that provides internet subscription services. Let's discuss them in detail:
|Name of Company||Percentage growth in stock price YTD (~)||Carl Icahn's Holding in Company's Total Capital|
|Netflix Incorporated (NASDAQ: NFLX)||93.41%||10%|
|Chesapeake Energy Corporation (NYSE: CHK)||20.48%||9%|
|CVR Energy Incorporated (NYSE: CVI)||10.75%||82%|
Source: Yahoo! Finance
After posting a good 4Q12, strong guidance for 1Q13, and strong content deals, the stock price of Netflix has seen an upward trend. No one will be more pleased by this rise than Carl Icahn, who purchased his stake in this stock for only ~$321.4 million, a stake which is now valued at ~$970 million. In 4Q12 the company’s revenue rose by ~8% y/y and the total count of global subscribers reached ~33 million. Domestic streaming for the quarter led to an increase of ~2 million subscribers.
Netflix’s management expects that the company will continue to give a similar performance at least for the next two quarters. As per the guidance for 1Q 2013, the total number of domestic streaming subscribers is expected to be ~28.5 million, up from the current ~27.2 million. The targeted increase in the number of subscribers is achievable, considering the new content deals it recently entered into with Time Warner and Flavor Unit Entertainment. Time Warner has agreed to show some of the famous cartoon series on Netflix that include episodes of Green Lantern, Robot Chicken, etc. As per the deal, the content will be available on Netflix from this April onward. The deal will prove to be a boon for the company as Time Warner's past success is well known, with its hit series like Ben 10, Johnny Bravo, etc. The company also entered into an agreement with Flavor Unit that gives it the rights to stream movies produced by Flavor Unit after they are released in theaters. It is to be noted that it is the same production house that produced hits like Beauty Shop, Bringing Down the House, etc.
Additionally, the company will continue to invest aggressively in original content (Netflix's own production), which accounted for ~5% of the total viewership during 2013. Netflix will release at least six original shows, starting with House of Cards, Arrested Development, Orange is the New Black, Derek, etc. Netflix's past experience with original content has been good. I feel that with the increasing tilt towards original content, its strategy to evolve as a complete service provider is on track. Looking at the strong content deals and the streak of original contents by Netflix I feel that it will be able to increase the number of subscribers domestically and the stock will gain some momentum.
The announcement of the stepping down of CEO Mr. Aubrey McClendon could lead Chesapeake Energy towards a more aggressive asset restructuring program compared to the previous expectations. In mid-2012 it was revealed that McClendon borrowed ~$1.1 billion from the company in the last three years and did not disclose this fact to investors. I believe that now a segment of investors who were earlier hesitant to invest in the company due to the concerns regarding corporate governance might take a second look at it, creating a slightly improved investor base.
With the exit of McClendon the asset sale is expected to accelerate to ~$19 billion in the year 2013. The change in leadership may give the restructuring plan a boost. Earlier Chesapeake's strategy was to bring its debt under control by selling its non-core upstream and midstream assets. However, now it is expected that the new leadership can bring in a more effective plan of action. The company targets to repay ~$9.5 billion of debt by the end of 2013 to strengthen its otherwise shaky balance sheet. In 2012 under the asset sale program it sold most of its midstream assets, and the remainder of it will be sold by the end of 1Q 2013. In the future, I also see the sale of assets like Miss Lime, Northern Eagle Ford, Chitwood Knox, and some other non-core assets.
Looking into the negative side, this whole drama of the departure of the CEO may result in a liability of ~$53 million to the company to be paid as compensation to him. Moreover, the increase in the sale of assets may affect the overall profitability and revenue generation capacity of the company, resulting in a low free cash flow in the coming year. Considering all this, until any further information is obtained from the company I will stick to a hold call for this stock.
CVR represents ~23% of Carl Icahn's portfolio. This second largest investment by the billionaire is relatively new, as most of it was made in 2012. He raised his investment in the company by ~465% in the second quarter of 2012, and it has been a good ride since then. In the end of January 2013, the CVR Energy traded at its best because the company declared a special dividend and a new quarterly dividend policy.
The amount of this special dividend is estimated to be ~$480 million, and will be distributed on Feb. 19, 2013. The company will start distributing the quarterly dividend of ~$0.75/share by the end of 2Q13. The dividend is synchronous with the 100% cash distribution policy of CVR Refining LP (NYSE: CVRR), in which the company holds majority share. The Master Limited Partnership (MLP) was recently formed via the spin-off of CVR's refining and crude-oil gathering assets. The MLP is expected to generate ~$700 million cash annually, and ~40% of its production for FY13 is hedged, which brings transparency to the future cash flows. Since MLP avails the benefit of non-payment of corporate income tax, the company can distribute higher dividends to its stakeholders. CVR itself made good profits in 2012 as it was benefited by the difference in prices of the cheap oil purchased and the high priced fuel sold. CVR is showing-off a robust balance sheet and confidence in the future generation of cash flows by announcing these dividends. With such assets in its bag and favorable fuel prices CVR's stock seems strong.
Summing up, content deals and investment in original content can help Netflix increase the requisite number of subscribers, and the company can repeat the strong performance of 4Q12. On the other hand, the Energy sector seems strong, and CVR's dividend policy and Refining LP's cash distribution policy proves this. But the changed leadership, aggressive debt restructuring, and selling-off of assets may or may not help Chesapeake Energy. I think until any further detail is obtained from the management Chesapeake should be a hold.
madhudube has no position in any stocks mentioned. The Motley Fool recommends Netflix. The Motley Fool owns shares of Netflix and has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy, Long Jan 2014 $30 Calls on Chesapeake Energy, Short Jan 2014 $15 Puts on Chesapeake Energy, and Long Jan 2014 $50 Calls on Herbalife Ltd.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!