In this podcast, Motley Fool senior analyst Bill Barker discusses:

  • Target's first-quarter results beating expectations.
  • CEO Brian Cornell's comments about organized (and violent) retail theft.
  • Retail sales rising in April.

Plus, Motley Fool host Dylan Lewis and senior analyst Bill Mann talk about Hindenburg Research's report on Icahn Enterprises, which raised questions about the conglomerate's accounting practices and its dividend.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on May 17, 2023.

Chris Hill: What happens when a short-seller collides with an activist investor? Details coming up. Motley Fool Money starts now. I'm Chris Hill, joining me in studio today, Motley Fool senior analyst Bill Barker. Thanks for being here.

Bill Barker: Thanks for having me.

Chris Hill: Let's talk Target, shall we? First-quarter results were better than expected. I'll leave it to you to tell me how high those expectations may have been. The thing I said the other day on this show that I was going to be watching with Target specifically was their inventory level. Inventory dropped 16% over a year, so it's moving in the right direction. They still have some work to do there. But it seems like this report and the comments from management were at least welcomed on Wall Street because shares are up about 3% as we're having this conversation.

Bill Barker: There's not a whole lot that's been changing here. You may recall that exactly 12 months ago they threw out a report that took the stock down 25% in a day.

Chris Hill: I remember. I'm a shareholder. We all remember.

Bill Barker: What was that rest of that day like for you?

Chris Hill: Kind of like all of 2022.

Bill Barker: They've been hanging around the same price. I mean, the same price today than it was at the end of that day, and they reset expectations at that point and they haven't really changed them today. They reiterated their guidance for the rest of the year. Things are more flat than anything else, both on the stock price and on sales when they're basically flat year over year on the sales and you know that inflation over that period of time has been ballpark 6%-7%. If you do the math, they're not really selling more stuff as much as they're selling a little bit less at higher prices and nothing is really evolving at the moment here.

Chris Hill: I think if you go back a year or so and even really just till the end of 2022, Target was a business that you could look at and say they have a lot of work to do. I look at this report, the inventory being just one example of, all right, they're making progress, they're doing the things they need to do, but they're not where they want to be as a business. I wanted to get your thoughts on this, one of the things CEO Brian Cornell talked very specifically about, and I'm curious to see if this is going to be something that we hear more of from other retailers, he talked about organized crime. He specifically said that, in the case of Target, their profitability is going to drop by about half a billion dollars compared to a year ago. I'm quoting here from the conference call, he said, "The unfortunate fact is violent incidences are increasing at our stores and across the entire retail industry." Shrink is one of those things every retailer deals with and it is, more often than not, almost a footnote to any one quarterly result. This is the first time in a while I can recall a major retailer CEO giving this much sunshine to this topic. I'm curious if you think we're going to hear from Walmart later this week. Do you think this is something that we're going to get more commentary on? Because they're all dealing with it. But Cornell is really calling this out as a problem for them.

Bill Barker: Half a billion dollars is a problem and it's a public negotiation, which is he's saying, look, other people have left, other companies have left some of these urban locations because whether they've said it exactly or not, they have said the employees were concerned for employee safety, so they're leaving certain urban locations. What he's saying is we would like not to leave them, we haven't left them yet, but we need some help. Essentially, we need some more police help. They're not going to draw a gun or something in the store if somebody breaks in and steal things. So what can they do, they can hire a few more security guards, but there's really not a good solution within the store to a crime that's going if the police actions aren't supporting them. So companies have the choice to leave places they don't want to be either for profitability, for safety, the reasons. He's I think calling out to like, what can you do? We want to be here, but we can't do it on our own.

Chris Hill: I want to go to the broader retailer environment in a moment. But first, just specifically with Target, you talked about the stock drop over the past year. When you look at this business and where the share price is right now, how attractive is this as a business?

Bill Barker: I think long term, it's attractive, not necessarily ballparking today's exact price and saying what's going to happen over the next year. But long-term shareholders of Target have been well served. So there's every reason to think that that's going to be a good investment over the long term. Now, you could have said that a year-and-a-half ago when the stock was almost double what it is right now and you would have been proven fairly wrong, so you don't want to just put your stock in. This has worked out well over the long term and any price is justifiable. Right now, you're seeing the stock at a P/E of about 27, which I would call high in general. Earnings are supposed to pick up next year and the year after, and you're looking at something more on like 16 times the two-year-out earnings. There's still a lot of confidence, a lot of, I would say, optimism priced into the stock, just not the same level of optimism as was the case with many other stocks toward the end of 2021.

Chris Hill: We also got the monthly retail sales data for April and it was up, not a lot, but overall, retail sales up almost half a percent. That reverses a trend of several months of retail sales declining. I like this for a couple of reasons. One, it's just nice to see it moving back up again. But the other reason is, I said coming into this earnings season and it's always nice to be proven right because it doesn't happen that often for me. But I said coming into this earnings season, this is going to be one of those seasons where every company is going to be judged on its own merits. This is not like a year ago where it didn't matter how good your numbers were or how rosy your guidance was. Stuff was selling off. This wasn't like the second half of 2020 where it didn't matter how brand-new your SPAC was to the public markets or how shaky your business was. Pretty much every stock was being bid up. This earnings season, it really seems like every company is being judged on its own and this retail data, it gives ammunition to the retailers that are delivering and it doesn't really give cover to any retailer management team who is tempted to excuse not-so-great results by saying, well, look, consumers just aren't spending. It's like no, consumers are spending, they just might not be spending at your place.

Bill Barker: They're spending on some things and not others, which is always the case. Year-over-year numbers, consumer staples are up about 13%. That's a lot of inflation and people are continuing to buy staples, discretionary up 3% year over year. This is across the S&P 500. Inflation-adjusted, that's a negative number. People have to spend on food, they're spending about as much as ever. Maybe a little more. Americans, a little bit more food all the time.

Chris Hill: Although as we talked about recently, the price of bacon has come down.

Bill Barker: Yeah, not enough. I mean, for those of us that prefer to have too much bacon. That's where things are right now. People are spending more on experiences. Everybody knows this. They're getting out. They're able to get out. A year ago, you still were dealing with the omicron, the outer edge of the surge on omicron. But you still couldn't travel easily back and forth internationally without getting a negative test. That is all going well. You look at the cruise lines are up 60% year to date. That's being hit pretty hard. The more discretionary experience, that's up. Discretionary home, you talked about Home Depot, I think down. Staples, well, people need their staples, and part of staples is health and beauty. I think Target pointed that out. People are going out more, so there's more call for looking good when you do so.

Chris Hill: Although it seems like, Home Depot's latest results aside, it seems like you're personally doing everything you can to boost the home improvement landscape.

Bill Barker: I don't know why you got to raise that. I didn't bring up how good you look and how much you must be spending on beauty products this week. Look at you. You look younger than ever.

Chris Hill: It's an audio podcast. I appreciate that and I know that like anyone who undergoes a home renovation, it's not necessarily going to schedule. But the Home Depot shareholders like me, we appreciate what you're doing.

Bill Barker: In Target, people enjoy the lotions that you've been buying or really whatever it is that's making you look so young today.

Chris Hill: If they were a sponsor of the show, I'd give them a shout-out, but I'm not going to do that.

Bill Barker: Are we going to talk about anything else here?

Chris Hill: Was there anything you wanted to hit before I kick you out?

Bill Barker: I don't know. It seems like the inappropriate thing to do to kick me out.

Chris Hill: Bill Barker. Always good talking to you.

Bill Barker: Thanks.

Chris Hill: Up next, Dylan Lewis and Bill Mann break down the recent report that Hindenburg Research published about Icahn Enterprises, including questions surrounding the company's accounting practices, its dividend, and why shares of Icahn Enterprises fell by 30% over the past month.

Dylan Lewis: Icahn Enterprises, the holding company owned and led by Carl Icahn, has been scrutinized recently by short-sellers at Hindenburg Research. They published a report in early May, questioning elements of how the company operated, specifically calling out valuations for its private and illiquid holdings, and expressing concerns over the company's premium to its assets and the sustainability of its dividend yield. To talk through that and explain what's going on for investors, I'm joined by The Motley Fool's Bill Mann. Bill, thanks for joining me.

Bill Mann: Hey, Dylan, how are you?

Dylan Lewis: I'm good and I think I'm probably having a little bit of a less chaotic month of May than the folks at Icahn Enterprises. We had a short report come out from Hindenburg Research, as I mentioned, and following that short report, the U.S. attorney's office for the New York Southern District contacted the company, seeking information related to asset values, governance, and more. All to say, this short report came out a couple of weeks ago and it seems like there is a lot worth paying attention to here. Want to dive into it. But I know that Icahn Enterprises is one of those companies that we don't talk about a whole lot on the show, and it's actually a lesser-followed public company. I wanted to just set the table here. What does this company do, and how do they make money?

Bill Mann: It is an expression of Carl Icahn's portfolio of companies that they've owned. You can think of it as being an asset manager. It is somewhat strange to me that the company is even public, and I think that the reason that it is public is because it is meant to give Carl Icahn and his family some access to liquidity. It also allows them to take margin loans against their holdings, and they have taken huge amounts. Up to 60% of his personal holdings in Icahn holdings have been pledged for margin loans. It's a weird company. The Icahn family owns 88% of it, so it is a controlled entity. I'm not sure why they went public, but once you go public as a company, you have a different set of obligations than you do as a private investor.

Dylan Lewis: Crucially, one of the things we should probably get out in front of here is this is a limited partnership business. We may be talking about units, you can think of those as shares just to add a little complexity to the conversation. But if you hear us talking about units, it's just because this is a slightly unique structure. But there were a lot of different categories that the Hindenburg report called out, Bill. We had the way that they were booking some of their private and less liquid holdings, there were elements of just the sheer premium that the company traded to relative to its net asset value, discussion of the dividend and its sustainability. Where do you want to jump into here? What's most interesting to you?

Bill Mann: I think that the most important thing to jump into is how they are valuing their illiquid assets. There are processes by which this happens. They are well known. But if you're talking about something that's illiquid, there is a huge amount of judgment that you can put into how it is valued. But if you've got a whole series of holdings that are generating some form of cash flows, you have to go back and be able to show how you went about valuing them. What Hindenburg is saying is that the Icahn Enterprises valuations that are somewhat inscrutable and they are very, very high, and you're talking about a company that is closely held by the family. They don't really have to answer to shareholders. They can't be voted out. They have 88% of the votes plus. But at the end of the day, because there are minority shareholders and because there is a dividend that you're not obligated to pay the dividend, but it is part, it is very much front and center why they are suggesting that people should invest in Icahn Enterprises. The valuation of those illiquid assets is very much germane as to whether this company is worth anywhere near what it suggests it is.

Dylan Lewis: You mentioned the dividend, and I want to dig into the dividend policy a little bit because I'm sure for people that are a little less familiar with this company, maybe doing that first search and taking a look at the stock, the company's yield probably pops out to a lot of people. The current yield is around 24%. Shares have fallen about 30% since the short report came out. But this is always a company that had a relatively high dividend relative to the price of its units. It comes up in the short report because there are questions about how long the company can continue to pay out this high yield and because, Bill, the dividend itself is structured in a unique way because not all shareholders are receiving that same dividend.

Bill Mann: You are getting at a lot of the reason why we haven't talked about this business very much [laughs] as a company that we would be interested here on The Motley Fool. It is a structure that is essential to the benefit of Carl Icahn and his family, and outwardly so. The dividend yield itself is not something that is, I don't know how to put this the right way, it's not necessarily the fault of the company. When you've got a 24% dividend yield, what the market is saying is that they do not believe that it is sustainable. They believe, for example, in these types of structures that some of the dividend comes in the form of a repayment of capital as opposed to income. A 24% dividend yield, that's not set by the company. What is being set by is the market saying we don't believe this to be sustainable. Because I don't know if you know this, Dylan, but the market is pretty good at determining what companies are worth over the long run.

Dylan Lewis: Yeah, the market has an incentive for that.

Bill Mann: You heard this, right?

Dylan Lewis: To do it at scale. What jumped out to me is just the unusual nature of the way that those dividends are paid out and how that may or may not affect the sustainability of the dividend. Typically, when people hear dividend, they assume we're talking cash, and that is true for a lot of the investors that own units of Icahn Enterprises. However, the larger shareholders, as you mentioned, the Icahns own about 85%, receive the dividend in units instead of in cash. That seems to mask whether or not this is a cash dividend that's actually sustainable.

Bill Mann: Just such an interesting thing because essentially, the way that they are doing it allows for the company to reconcentrate additional shares to Carl Icahn. Lots of companies have differential dividend payout. It's not something that you would look at and say this is illegal, or immoral, or fattening. It's fine. But whenever you see that, you do want to ask yourself, who benefits? Why did they structure it this way? Ultimately, what are the additional risks, not just to the dividend, but to the principal of the company that you own? Just a second ago, I mentioned that it was a return of capital as opposed to fully a dividend. Basically, what that means is that when a company does not generate enough income to satisfy a dividend, essentially, what they're doing is paying out of money that they would conceivably otherwise be reinvesting into other businesses.

Dylan Lewis: To that end, Bill, the company has not been profitable, I believe, for the last four years. There hasn't been income to share with investors, which gets at exactly what you're talking about there.

Bill Mann: You got to be a little bit careful when you're talking about LPs like this because not necessarily profitability because they don't have huge income streams from the business itself. A lot of those income streams are passive because through the holdings in some of the companies that they own like, for example, SandRidge Energy, the other day announced that they were paying a much larger dividend and a return of capital and they were doing a buyback. That's a company that IEP, Icahn Enterprises owns. So they will get cash from that. People are looking at that going, "That's interesting timing." But that's where the income comes from. You have to be a little bit careful when you talk about a company asset manager's profitability. That's not necessarily the most important way to look at it. But still that cash for a dividend does have to come from somewhere.

Dylan Lewis: We've talked about how Carl Icahn and his family are receiving the dividend in shares or units. Shares outstanding for this business have effectively doubled over the last five years, and that's a roundabout way, Bill, of saying that there has been some pretty heavy dilution with this business as a consequence of just how it's operated.

Bill Mann: Yeah, and that's one of the claims of Hindenburg and I do want to make sure that we do say this so that people who are listening are clear. We have not corroborated what Hindenburg is saying. When I say Hindenburg is saying this, I don't know that it's true. I do know that their win-loss record is pretty strong, so I would take it as being a credible suggestion. But one of the things that they're saying, because the Icahns have levered up so much and they've taken so much money out in the form of margin loans against their own holdings, that they presume that the Icahns are using the money that they have received from shares to prop up the company by buying additional shares, which is an incredible way to look at it. If it is true and Hindenburg uses this word, it would be Ponzi-like. It would be a way to prop up a company and it's fine if you can fill that hole, I guess. Ultimately, it's not fine. But if you can fill that hole, you may be able to get away with it. But if you can't, at some point, the amount of capital that you have at your disposal is not going to be enough in order to keep the game going. As far as Hindenburg is suggesting, when that happens, Icahn Enterprises is going to collapse.

Dylan Lewis: It remains to be seen exactly what this all leads to. But I think two weeks out from this initial short report and seeing that there's some interest from folks at the U.S. attorney's office in New York, it seems there's at least something worth paying attention to here. Shares are still down 30% from when this report came out. I think the market is continuing to weigh the merits of what's being discussed here. To me, I think, Bill, if nothing else, this just seems it shined a spotlight on things that seem kind of strange for a business or worth paying attention to for a business. I think for investors, if the amount that they pay attention to this stops there where it's you take the lessons from this thing and just leave it exactly there.

Bill Mann: One thing that is it's important to note is that Carl Icahn has called himself a warrior for corporate transparency. One of the things that I always think about when companies go public, if they are a little bit weird, I always just ask myself, why is this happening? Why is this company going public? Carl Icahn did not need for Icahn Enterprises to go public, for him to have been a sensationally successful investor over time. Something was weird about this. I know that's great analysis. Hey, it's weird, but something was really strange about this from the outset, why it is that they decided to go public. They don't need or presumably didn't need the capital for additional investing. I think that this was done simply for the benefit and the liquidity needs of the Icahn family as Carl Icahn comes to the end of his career. To me, that's not a situation in which I think the average investor should be excited to be on the other side.

Dylan Lewis: Bill Mann, you're the man I call when things are weird to help talk through it. Thank you for explaining this one and right through with me.

Bill Mann: Thanks, Dylan.

Chris Hill: As always, people on the program may have an interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.