Investors buy growth stocks to target substantial price gains. Growth can be achieved from a mix of earnings or cash flow growth from a thriving business and valuation expansion from an undervalued stock rising in price to a higher valuation. Brookfield Infrastructure Partners (TSX:BIP.UN) has both drivers that can drive strong growth for the stock. So, it’s my number one growth stock pick to buy this month.
Cheap valuation
First of all, the dividend stock trades at a cheap valuation, as suggested by a pop in the stock after reporting its recent results. After reporting solid third-quarter (Q3) results yesterday, the global infrastructure stock climbed 10.8% on the day!
At $34.78 per unit at writing, the top stock is still cheap. TMX shows that the consensus price target is $56 based on nine analysts offering 12-month price targets for the stock in the last six months. Despite the pop, the price target still represents a massive discount of approximately 38%.
Even to be more conservative, let’s say we anticipate the stock to arrive at $56 in three years; the stock would still deliver annualized returns of roughly 23% from an attractive 6.1% cash distribution and annualized price appreciation of 17.2% over a three-year period.
Growth
Thanks to Brookfield Infrastructure Partners’s business model that works through economic cycles, the top utility stock continues to experience higher growth versus the sector. It has a large size and scale that generates sustainable cash flows. It owns and operates assets diversified across utility, transport, midstream, and data infrastructure assets. Furthermore, it recycles capital by selling mature, value-added assets and reinvesting the capital for higher risk-adjusted returns.
BIP has delivered and will likely continue to achieve above-average growth in the utility sector. Its Q3 funds from operations (FFO) per unit rose 7.4% year over year. Its year-to-date FFO per unit climbed 8.5% year over year. In the Q3 press release, management provided optimism for its future prospects: “The market backdrop has created a strong environment for capital deployment, with returns on new investments expected to be well in excess of our 12-15% target. Our 2023 deployment is expected to provide us with some of the best risk-adjusted returns we have seen in the last decade.”
Recent acquisitions
Brookfield Infrastructure took private Triton, its global intermodal logistics operation and closed the transaction at the end of September. It strategically funded the transaction primarily with new Brookfield Infrastructure Corporation shares, which trade at a premium to BIP shares. Management noted, “We expect to generate a base case [internal rate of return] above our targets, derived largely from the in-place cash yield. The leading market position and highly cash generative nature of the business provides strong operational flexibility to invest in fleet replacements and growth during favourable markets, or to harvest cash in less attractive markets.”
It is also growing its data centre business. It acquired Data4 and Compass, which closed in August and October, respectively. As well, its most recent acquisition is a portfolio of data centres out of bankruptcy from Cyxtera and the associated real estate underlying a few of the sites from third-party landlords. “As part of this transformative transaction, cash flow for the combined entity will undergo a step-change improvement from the real estate acquisitions, financial synergies and lease savings negotiated with Cyxtera’s third-party landlords during the bankruptcy process. The transaction is expected to close in Q1 2024.”
