The Icahn Factor

 | Jan 23, 2014 | 4:20 PM EST  | Comments
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Stock quotes in this article:

ebay

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amzn

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ma

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nflx

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scty

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tsla

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hain

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aapl

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You can write a whole book about Carl Icahn's moves in this market. It's almost as if he is the central character in so many instances, and he's the symbol of this new era of aggressive activism.

We know as of this morning that his latest cause célèbre is eBay (EBAY), specifically breaking it up into plain old eBay and PayPal. When I spoke to eBay CEO John Donahoe this morning about keeping it all together under one roof, he made a compelling case for the status quo. EBay's core business helps PayPal grow, and vice versa. The company has terrific growth and Donahue is managing the many segments very well. When you have growth in the low teens in general merchandising (the old eBay), accelerated growth in third-party Web fulfillment despite competition from the beast that is Amazon (AMZN), and a 16% increase in PayPal subscribers, that's downright impressive.

But I can easily understand Icahn's frustration as the stock's been static for a year -- a year where PayPal lookalikes such as MasterCard (MA) and Visa (V) are up gigantically, even as they are growing slower and more methodically. MasterCard, with 1.2 billion card holders, eight times the number of PayPal and growing only at 10%, has traveled to $82 from $49 per share through that period. Visa, with 2.5 billion card holders and 6.5% growth, has gone to $228 from $152 per share.

It's important to point out that eBay has a $71 billion market cap vs. MasterCard's $9.9 billion and Visa's $145 billion, but it is quite possible that PayPal would be loved for its faster growth and that eBay's retail business would be getting a higher multiple given how much faster the company is growing than its bricks-and-mortar competition.

So what's holding eBay back? First, Donahoe has continually promised terrific growth and delivered only good growth. Second, the company is perpetually viewed as a break-up candidate that's not being broken up. If Icahn hadn't surfaced, I suspect eBay would be in the high $40s, down 10% from where it was, as this was still one more overpromise and under-deliver quarter.

But let's talk about some other Icahn investments. Icahn bought a ton of Netflix (NFLX), up more than $50 today, when the stock was just north of $50. It's far more than doubled. How did he hit this one out of the park when so many others missed it? I think he simply realized that the opportunity was much bigger than the market capitalization, and it might still be given its growth prospects. Just like Amazon, SolarCity (SCTY) and Tesla (TSLA), Netflix is a concept stock, and Icahn got the concept. When will Netflix stop going up? Probably when the multitude of naysaying analysts capitulate.

Icahn took a very big position in Hain Celestial (HAIN) about $60 ago for a similar reason: He recognized the trend of healthier, better eating that I trace out in Get Rich Carefully. He's now left the stock but only after a huge gain.

Which leaves Apple (AAPL) and Herbalife (HLF). Apple's a tough one because Icahn is calling the board disgraceful because it isn't buying back more stock, while I wish it had bought Netflix when Icahn did, solidifying its position in the home. Icahn wants value to be brought out via the buyback. I want growth to accelerate from terrific products, but I am agnostic on getting the stock higher.

Herbalife? What can I say? This is a stock that people are in because people believe in Icahn as opposed to Herbalife nemesis Bill Ackman. As Herb Greenberg writes elsewhere, that's a shame because they kick it out the moment a politician calls for an investigation, even though I don't think that will go very far. That said, the easy money has been made.

Why focus on Icahn beyond prurient interest? Because he is the public face of a new thrust in bringing out value, the stakeholder who gets long and loud in an era where boards are getting more responsive than ever to disgruntled shareholders. I guess you could say that even on a down day, we must remember there are ways to win, and one of them is to bank on an activist like Icahn when he swoops in either to change or to conquer.

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