Brookfield (TSX:BN) is one of the Canadian stocks most beloved by value investors worldwide. It has a cult following all over the world, having been owned by investors like Mohnish Pabrai, Josh Tarasoff, and Chuck Akre. The company has also done deals with the likes of Howard Marks, who has a 20% CAGR career track record. “CAGR” means compound annual growth rate, a measure of annual returns.
So, Brookfield is a very well-respected company. The question is, is it a buy now? Central banks around the world have been raising interest rates for over a year, and Brookfield has a lot of debt. So, the company’s cost of capital has increased and has taken a bite out of its earnings. The decision to invest in Brookfield today is a bit more complicated than it was a decade ago but, as we’ll see, the company probably still has a good future ahead of it.
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The stock is historically cheap
It is true that Brookfield stock has been beaten down in recent years, but as a result of that, it has a cheaper valuation than it once had. At today’s prices, Brookfield trades at:
- 12.6 times distributable earnings (DE). DE is an alternative earnings metric Brookfield uses to measure its dividend-paying ability.
- 0.59 times sales.
- 1.1 times book value.
- 8.6 times operating cash flow.
This is a pretty modest valuation. For comparison, the S&P 500 currently trades at 21 times earnings and the NASDAQ-100 at 31 times earnings. Going by earnings multiples, Brookfield is cheaper than the North American markets as a whole. It’s also less pricey than itself at many points in the past. So, if Brookfield can successfully navigate the higher interest rate situation, then it may deliver upside for investors in the future.
It is investing in growth
Despite being a cheap stock, Brookfield is still growing as a company. The company is busy doing deals in the historically cheap 2023 market, having done about $50 billion worth of them in the first half of this year. For example, it bought Duke Energy’s wind portfolio for $3.2 billion, and shipping giant Triton International for $13.3 billion. These companies and assets were profitable when Brookfield bought them, so they should start adding to the company’s earnings power once they are fully absorbed.
There’s also real estate. Real estate has been a sour point for Brookfield this year, as the company defaulted on some of its property loans. However, CEO Bruce Flatt thinks that big opportunities are coming in real estate. He believes that prices are set to fall and the “best deals since 2009” will shortly become available. If that comes to pass, then we may see Brookfield buying properties in the near future.
One big risk to watch out for
Despite all of the positive things I’ve written about Brookfield in this article, interest rates remain a big risk for investors to keep an eye on. Last quarter, BN’s interest expenses increased by $1.4 billion, one of several factors that caused net income to decline precipitously in the quarter. Some of that was due to new borrowings, but the lion’s share came from higher interest rates on pre-existing variable rate debt. Should the Federal Reserve hike rates again at its Wednesday meeting, then those interest expenses will increase further. So, despite my overall positive view on Brookfield, the company is exposed to risk factors that investors will need to continuously monitor should they buy the stock.
