AI Driven Power Demand And Energy Fundamentals Will Support Long Term Earnings Turnaround

Catalysts

About Icahn Enterprises

Icahn Enterprises is a diversified holding company that invests in and actively manages a portfolio of operating businesses across energy, automotive, real estate, food packaging, home fashions, pharma and other sectors.

What are the underlying business or industry changes driving this perspective?

• Improving energy fundamentals, including structurally wider crack spreads, resolution of historical small refinery exemption liabilities and a more favorable regulatory backdrop for smaller refiners, can support higher segment EBITDA and contribute to growth in NAV and distributable earnings.
• AI driven power demand and the rapid buildout of data center infrastructure are increasing returns for certain utilities such as AEP, which may result in a multi year runway for higher investment income and potential uplift in indicative net asset value.
• Ongoing expansion of data center, power generation and industrial activity in high growth regions like Northern Nevada, combined with supportive utility regulation, can support above peer earnings growth at holdings such as Southwest Gas, enhancing Icahn Enterprises proportionate share of consolidated revenue and cash flow.
• Active ownership in asset rich and turnaround situations such as EchoStar, IFF, Caesars and Monroe, together with a strong balance sheet and permanent capital, creates repeated opportunities to crystallize value through asset sales, balance sheet optimization and buybacks, which can contribute to net income and per unit earnings growth over time.
• Strategic portfolio actions, including unlocking real estate value from automotive properties, restructuring underperforming segments and advancing high potential pharma assets such as the PAH program, position the group for potential margin expansion and a more resilient earnings mix as these initiatives mature.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Icahn Enterprises's revenue will remain fairly flat over the next 3 years.
• Analysts assume that profit margins will increase from -4.2% today to 23.3% in 3 years time.
• Analysts expect earnings to reach $2.2 billion (and earnings per share of $3.47) by about December 2028, up from $-391.0 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 5.5x on those 2028 earnings, up from -12.1x today. This future PE is lower than the current PE for the US Industrials industry at 6.3x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.4%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The energy segment is heavily reliant on structurally wider crack spreads and the continuation of small refinery exemptions in a politically sensitive regulatory environment. Any reversal in EPA policy or narrowing of crack spreads as the Ukraine conflict normalizes could compress refining margins and materially reduce segment EBITDA and net income.
• AI driven power demand is a key pillar for AEP and Southwest Gas, but a slower than expected buildout of data center infrastructure, efficiency gains in AI hardware or policy constraints around data center energy usage in key jurisdictions could reduce growth in utility earnings and limit the uplift to consolidated revenue and earnings.
• Several controlled businesses are currently facing operational and demand headwinds, including lower volumes and inefficiencies in Food Packaging, softening demand in Home Fashions and generic competition in Pharma. If restructuring efforts underdeliver or the PAH program fails in trials or is delayed, these secular and competitive pressures could weigh on group margins and earnings for an extended period.
• The strategy of closing underperforming automotive locations and transferring owned properties into the Real Estate segment assumes that real estate development and repositioning will unlock value. However, a weaker long term commercial real estate market, higher interest rates or a slower than expected construction ramp could depress real estate EBITDA and limit the anticipated improvement in automotive profitability and cash flow.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $12.0 for Icahn Enterprises based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $9.3 billion, earnings will come to $2.2 billion, and it would be trading on a PE ratio of 5.5x, assuming you use a discount rate of 10.4%.
  
• Given the current share price of $7.9, the analyst price target of $12.0 is 34.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.