Buffett or Icahn: Whom to Invest With? Two billionaires; two investment vehicles. At current prices, Berkshire is the better value for investors

March 9, 2014 Leave a comment

TUESDAY, MARCH 4, 2014

Buffett or Icahn: Whom to Invest With?

By ANDREW BARY | MORE ARTICLES BY AUTHOR

Two billionaires; two investment vehicles. At current prices, Berkshire is the better value for investors.

Companies controlled by the two billionaire investors have recently reported strong results for 2013. Berkshire Hathaway ( BRKA / BRKB ) recorded an 18% increase in its book value per share, while Icahn Enterprises (IEP) said its asset value rose 50% last year.

Berkshire looks more appealing now than Icahn Enterprises because its shares command a smaller premium to asset value and Berkshire has significantly more earnings power. Berkshire’s class A shares, now around $177,000, trade for 1.3 times the company’s year-end 2013 book value of about $135,000 a share.

Icahn Enterprises, at $114, fetches a 40%-plus premium to what the company calls its “indicative asset value” of about $79 per unit as of the end of last year. This measure is based on the value of Icahn Enterprises’ assets, notably a $3.7 billion stake in a hedge fund run by Icahn – the fund owns stakes in Apple, Forest Labs, Herbalife and Transocean – as well as sizable equity interests in CVR Energy, a refiner, and Federal Mogul, the auto-parts company.

The premium valuation of Icahn Enterprises looks excessive because its financial performance hinges on the success of Icahn’s investments. The company only has a small group of wholly owned businesses that produce little profit. Barron’s has argued that Icahn Enterprises deserves some premium above its asset value based on Icahn’s long-term success as an investor, but that the units ought to trade closer to $95. Icahn Enterprises traded as high as $149 in December. If Icahn’s investment results falter, the units could come under pressure.

While Berkshire trades at a modest premium to its book value, what the 83-year-old Buffett calls the company’s intrinsic value “far exceeds” book value, according to comments in his 2013 shareholder letter. This suggests Berkshire could be trading now at a discount to its intrinsic value.

Berkshire has a lucrative group of wholly owned businesses, including the Burlington Northern railroad, GEICO (auto insurance) and MidAmerican (utilities) that produced about $15 billion in net income last year.

Assume some profit improvement this year and Berkshire’s book value could hit $145,000 a share by year-end 2014, meaning the shares now trade for little more than 1.2 times forward book. This book-value forecast doesn’t assume any investment gains. Include gains and book could approach $150,000 per A share.

That 1.2 times book level is where Berkshire stands ready to purchase its shares, backed by a strong balance sheet with $42 billion in cash. Buffett suggested Berkshire would be ‘aggressive’ with buybacks at the 1.2 times book level.

Nomura analyst Cliff Gallant yesterday lifted his price target on Berkshire to $199,000 from $194,000 and reiterated his Buy rating on the stock. “We view the current valuation as attractive for a stable and strong mix of long-term earnings streams,” he wrote in a client note.

Icahn Enterprises is smaller and less liquid than Berkshire. Icahn controls almost 90% of the 115 million outstanding units, resulting in small public float. The market value now is about $13 billion. Berkshire is valued at about $290 billion.

Icahn’s investment performance remains strong, with the hedge fund up about 5% through February, boosted by a big gain in Forest Labs. Icahn continues to deliver, but the current price of Icahn Enterprises discounts a lot more success by the 78-year-old billionaire. Berkshire looks like a better bet.

 

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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