Berkshire Hathaway (NYSE:BRK.B) and Brookfield Asset Management (TSX:BAM) are two companies that are often compared to one another. Their business models are very different (Berkshire buys businesses directly. BAM manages them for investors), but they are similar in philosophy.
Both Berkshire and Brookfield Asset Management invest for the long term with a generally value-oriented mindset. They are both widely owned by value investors and are owned or run by people in Warren Buffett’s sphere of influence (e.g., Mohnish Pabrai and Howard Marks). So, these two companies are worth comparing.
In this article, I will compare Berkshire and Brookfield Asset Management side by side, so you can decide which is best for you.
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The case for Brookfield Asset Management
A case can be made for buying BAM instead of BRK.B because the former is lighter on assets. Heavy assets (property, plant, and equipment, or PPE) cause significant expenses like maintenance and upkeep. These expenses eat into profitability, and Berkshire Hathaway has a lot of them.
In a recent letter to shareholders, Warren Buffett wrote that Berkshire Hathaway was the biggest holder of PPE in America. In one way, it’s a good thing: assets can be sold to generate liquidity and sometimes even profits if they don’t depreciate. But they bring in a lot of recurring expenses.
Brookfield Asset Management is not ladened with heavy assets like Berkshire is. As an asset manager, any property it’s involved with is held on behalf of investors, the costs are not directly borne by BAM itself. All BAM does is handle the management of such assets and collect fees for doing so. This is what’s called an “asset-light business model” and it’s usually considered a good thing.
Another factor that BAM has going for it is profitability. In the last 12 months, BAM’s profitability metrics included the following:
- An 80% gross margin
- A 72% operating income (earnings before income and taxes) margin
- A 52% net margin
- A 60% free cash flow margin
This is, frankly, a stunning level of profitability. Berkshire Hathaway is usually profitable, but its margins are nowhere near these.
The case for Berkshire Hathaway
The case for Berkshire Hathaway rests on its excellent management team and its valuation.
Warren Buffett has one of the best investment track records in history. He averaged 32% per year in his days running funds; he has averaged 20% per year since taking over Berkshire Hathaway 60 years ago. This easily makes Buffett one of the most successful investors of all time. The lieutenants who will take over from Buffett are very good as well. For example, Ted Weschler achieved a 30% annualized return in his Roth IRA, which is the Canadian equivalent of a Tax-Free Savings Account. His IRA is worth around $250 million today!
Berkshire is also somewhat cheaper than Brookfield Asset Management at today’s prices. Today, Berkshire trades for the following:
- 22 times earnings
- 2.3 times sales
- 1.4 times book value
- 18.7 times operating cash flow
That’s much cheaper than BAM, which, today, trades at 3.4 times sales.
Bottom line
Overall, between these two companies, I’d personally go with Berkshire (I hold it, in fact), but I consider BAM mighty enticing as well.
