Brookfield (TSX:BN) is one of the most talked about Canadian stocks. It’s not one of the biggest, going by market cap, but it is one of the most popular, owing to its management’s sterling reputation. Over the years, Brookfield CEO Bruce Flatt has built up a great reputation as a long-term builder of shareholder value. He practices a conservative value investing approach that has rewarded investors handsomely over the years. Under Flatt’s leadership, Brookfield reportedly compounded its investments at 16% annualized over the last decade, and it acquired many wholly owned subsidiaries. In this article, I will explore Brookfield stock and attempt to determine whether it is a good buy at today’s prices.
What Brookfield owns
Brookfield is an investment company that is involved in managing assets for fees, and in owning assets directly on its balance sheet. Its asset management is largely done through Brookfield Asset Management (TSX:BAM) while its wholly owned subsidiaries are separate from that company. They include:
- An insurance business.
- A private equity business.
- A credit platform (in partnership with Howard Marks’ Oaktree).
This diverse mix of businesses gives Brookfield a piece of both sides of the finance pie: fee-based management and equity ownership. So the company has the power to compound and participate in Brookfield Asset Management’s asset-light high-margin business. There’s a lot to like here. There are some real risks to investors too, though, and they’re worth paying attention to. Check out the video below for more on that.
- Motley Fool exclusive video: Can Brookfield Fail?
Brookfield’s latest earnings
In its most recent quarter, Brookfield delivered:
- $23.3 billion in revenue, up 6.4%.
- $424 million in net income, down 86%.
- $945 million in distributable earnings, down 0.2%.
The extreme decline in net income might look bad, but it’s not as bad as it appears. It was largely due to decreases in fair values of assets (a non-cash cost that doesn’t impact dividend-paying ability). Take that out and we get a decline in distributable earnings that’s not even 1%. Overall, a relatively satisfactory quarter.
One of the most appealing things about BN stock right now is its valuation. At today’s prices, BN trades at:
- 11.3 times earnings (specifically, the best estimate of next year’s earnings).
- 0.5 times sales.
- 1.2 times book value.
- 5.8 times operating cash flow.
This is a very cheap stock. And, in fact, insiders seem to agree with this assessment. Just last Friday, Brookfield CEO Bruce Flatt sold many of his BAM shares to buy BN. So, evidently, Flatt believes that BN is the better buy of the two “Brookfields” today. That should tell you everything you need to know.
Brookfield is a true gem of a company. It has a great, high-margin subsidiary in Brookfield Asset Management, and multiple wholly owned companies that are highly profitable in their own right. Bruce Flatt’s track record as CEO speaks for itself. Having compounded the company’s asset values at 16% over 10 years, he has shown that he knows what he’s doing.
So, should you buy BN stock? Well, nobody can ever say to a person they’ve never met that they should buy a stock. You need to meet the other person and find out their individual circumstances. But I would say that Brookfield is more worthy of serious study than the average TSX stock is.