There's More to Icahn's Portfolio Than Just Apple and Dell

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Carl Icahn has been in the news recently. The 77-year-old billionaire investor's recent flurry of activist and aggressive investing activity has seen the previously unknown investor suddenly come to the forefront in the investing world. Indeed, some market commentators have actually claimed that thanks to his recent outperformance, Icahn could actually be a better investor than the Oracle of Omaha, Warren Buffett himself. 

Personally, I believe Icahn is not comparable to Buffett for the reasons set out here, but the jewels of Icahn's portfolio are not limited to the likes of Apple and Dell.

A turnaround play
For a start, the Icahn portfolio contains beaten-down Transocean (NYSE: RIG  ) , a company that has transformed itself over the past two years. It has divested noncore assets, improved operational efficiency, and focused on ultra-deepwater markets, which are set to see rapid growth over the next few years. In particular, Transocean noted an improvement of operational efficiency from 89.6% at the beginning of 2012 to 94.7% by year-end. 

However, what really excites me about Transocean is the company's predicted growth, valuation in relation to book value, and dividend payments -- currently some of the best in sector. According to some analysts' estimates, Transocean's revenue is set to grow 10% to 11% throughout 2013 and 2014 before slowing to 4% during 2015.

Meanwhile, earnings before interest, taxes, depreciation, and amortization are expected to expand 26% annually for the next three years. As efficiencies are worked through, the company's operating profit margin is set to grow from 2012's level of 18.3% to 35% during 2015. Fully diluted earnings per share are expected to be around $7.55 by 2015.

I have also mentioned that the company's book value looks attractive. Currently trading at a price-to-book ratio of 1.1, Transocean looks cheap compared to similar-sized peer SeaDrill, which trades at a price-to-book ratio of three.

The one factor that previously hung over Transocean was its Macondo-related liabilities. However, the recent $1.4 billion settlement with the U.S. Department of Justice payable over five years is the first step to a resolution and puts the company on solid footing to look beyond Macondo.

A play on the U.S. oil boom
The other jewel in Icahn's portfolio is American Railcar Industries (NASDAQ: ARII  ) .

The oil boom within the U.S. has created a transport problem. Bottlenecks and political wrangling have slowed down the transport of crude by pipeline. In addition, many pipelines do not reach the regions required, leaving producers with only one other option for transportation: rail.

This is where American Railcar steps in. The company not only manufactures railcars and tanker cars to sell, but it also manufactures railcars for lease -- a lucrative business. Railcar leases are usually signed for five to seven years, which locks in cash flow. Moreover, these leases are highly cash-generative, and during the second quarter, the company's leased railcars generated a 10% annualized return on total assets.

Having said that, only 5% of American's revenue currently comes from the leasing of railcars and tankers. Nonetheless, the company is reinvesting all profit in its leasing fleet, which is set to expand 89% over the next few quarters, according to orders the company has in place. This doubling of the rental fleet should boost total revenue by 7.5% and almost double recurring revenue. Moreover, as the rental fleet's construction is funded from cash on hand, any profit over the next few years goes straight to the bottom line.

Indeed, a great example of the benefits of leasing and the earnings power of long-term, cash-generative leases can be seen in the company's first-half results. American Railcar noted a 250% rise in lease income, although overall revenue only expanded by 2%. Nonetheless, thanks to the fact that rental revenue goes straight to the bottom line, year-on-year earnings from operations expanded 42%.

This is where value is rising,and the company should become extremely cash-generative over the next few years.

If you can't choose one..
While Transocean and American Railcar present attractive opportunities, Icahn's Icahn Enterprises (NASDAQ: IEP  ) itself could also be a good bet. Akin to a mini Berkshire Hathaway, Icahn Enterprises has a multitude of shareholdings. As a partnership -- unlike Berkshire -- Icahn Enterprises distributes a payout to unit holders, which currently stands at 6.4%.

Furthermore, whereas Berkshire is overweight insurance and financial operations, Icahn Enterprises offers more diversification, with the bulk of its earnings spread across three divisions: investments, automotive, and energy.

Additionally, Icahn Enterprises has its own railcar lease fleet, which, as I have mentioned, is a great way of generating strong, recurring cash flow. What's more, Icahn Enterprises' real-estate division provides an interesting play on the housing market for those investors who do not wish to take much risk.

In particular, Icahn Enterprises holds a share of WestPoint Home, one of the largest providers of home-textile goods within the U.S. Additionally, Icahn's holding company owns a large portfolio of real estate ($787 million at the end of Q1 2013), with both rental real estate and development operations underway.

All in all, Carl Icahn is best known for his large activist positions in Apple and Dell, but the investor's portfolio also contains other gems. American Railcar and Transocean offer attractive long-term outlooks and currently look undervalued.

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Rupert Hargreaves

Rupert has been writing for the Motley Fool since December 2012. He primarily covers tobacco and resource companies with a passion for value-oriented investments. .

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Related Tickers

5/24/2016 11:33 AM
ARII $39.88 Up +0.67 +1.71%
American Railcar I… CAPS Rating: ***
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Transocean CAPS Rating: ****
IEP $55.21 Up +0.67 +1.23%
Icahn Enterprises… CAPS Rating: ***