What happened
Icahn Enterprises (IEP -0.12%) rebounded last month following a massive sell-off in May caused by chatter from high profile short-sellers and activist investors. The master limited partnership (MLP) climbed 29% in June, according to S&P Global Market Intelligence, after its distribution yield climbed above 35%.
So what
There were no press releases, securities filings, or major news regarding Icahn Enterprises in June. Instead, the stock moved higher as it looked for equilibrium after a tumultuous May.
Hindenburg Research, which is notorious for publishing research pieces on stocks that its team has deemed overvalued, had its sights set on Icahn Enterprises. It released a report on May 2 with some seriously negative assertions.
Icahn Enterprises is an MLP, so it functions somewhat differently from regular stocks. It owns a number of business interests, and passes cash inflows from those businesses on to unitholders. These distributions function similarly to dividends that you would see in a normal stock, but they have different tax ramifications.
Image source: Getty Images.
Hindenburg cited Icahn's enormous premium to the net asset value of the business equity held by the MLP, which is significantly higher than any comparable company on the market. The report's authors suggested that Icahn Enterprise's price is being artificially inflated by an unsustainably high distribution yield, which is currently approaching 28%.
The report suggested that the distribution is only made possible by manipulation by Carl Icahn, who owns the vast majority of outstanding units. It suggests that distributions are being made with the proceeds of asset sales, rather than operating cash flows from the portfolio, and that illegitimate support from a high-profile Wall Street analyst contributed to the overvaluation.
Those are serious accusations, and it got even worse when renowned activist investor Bill Ackman voiced his general agreement with the report's findings. Icahn Enterprises fired back with its own aggressively worded response, but that wasn't enough to keep the unit price from tumbling more than 50% in May.
IEP price-to-book-value data by YCharts.
However, that massive dividend yield was hard to ignore, especially as investors look for safe returns in a confusing macroeconomic environment. The stock swung back higher as investors digested the report and weighed the potential risks relative to the current return potential.
Now what
Hindenburg's report does have at least some merit. Units objectively trade at an abnormally high premium to net asset value, even after the May decline. Icahn Enterprises' cash flow statements clearly show that proceeds from asset sales dwarf operating cash flows from portfolio profits.
The MLP would likely argue that asset appreciation is due to its own activism, and that this model is actually sustainable as a result. This puts Icahn Enterprises firmly in high risk/high reward territory, and investors should approach the MLP accordingly.
