Brookfield (TSX:BN) is simultaneously one of Canada’s most beloved and most controversial stocks. On the one hand, the company has a great reputation among investors and a fantastic long-term growth track record. On the other hand, the company’s funds are defaulting on loans and at risk of being downgraded by S&P Global. There’s a lot going on with this company, both good and bad. In this article, I explain why I’m buying Brookfield stock in 2023, despite knowing that it faces considerable risk factors.
Brookfield: Overview
Before revealing what specifically I like about Brookfield, I should explain what the company does. That is harder than it looks. Brookfield has often been described as a “complex” company. I don’t think it’s necessarily as complex as it’s sometimes made out to be, but it is certainly more complex than the average company.
So, what is Brookfield, and what does it do?
More than anything else, Brookfield is a financial holding company. It owns an asset management business, an insurance business, and a real estate portfolio. It also operates a number of partially owned partnerships that function something like investment funds. Brookfield simultaneously invests in these companies itself and collects fees for managing the funds associated with them.
Brookfield’s partnerships are a big part of why it’s controversial. It’s within these partnerships — not at the corporate level — that Brookfield is having credit problems. Brookfield Property Partners has already defaulted on over $1 billion worth of debt. S&P Global is threatening to downgrade it to Junk. This is a problem for BPY, as it will raise the business’s cost of capital. However, Brookfield maintains high ratings at the corporate level, so it will survive the real estate business being downgraded to junk if that occurs.
Cheap valuation
One thing that Brookfield has going for it today is a cheap valuation. At today’s prices, Brookfield trades at the following:
- 20 times the best estimate of next year’s earnings
- 0.55 times sales
- 1.3 times book value
- 6.7 times operating cash flow
Going by multiples, Brookfield stock is pretty cheap. Indeed, the company itself says that it is currently trading at just 0.5 times net asset value. If that’s the case, then BN is an even bigger bargain than it looks like based on the multiples I showed above.
Excellent assets
A second thing Brookfield has going for it is quality assets. Although some analysts think that Brookfield has borrowed too much to acquire what it owns, there’s no doubt that some of these assets are of very high quality. Among other things, Brookfield owns the following:
- A 51% interest in Westinghouse, the world’s biggest nuclear service company
- A 67% stake in Oaktree Capital, the world’s premier credit investors
- A 75% interest in Brookfield Asset Management, an asset manager with a 50% net margin
- A wholly owned collection of high-rent trophy properties in prestigious U.S. locations
These assets provide a lot of recurring revenue for Brookfield — so much so that I think the company will be able to handle the debt issues it’s going through. If the Fed keeps hiking interest rates, then Brookfield will experience problems, but it looks like the Fed is done hiking for now. The most recent U.S. inflation report showed just a 3.3% increase in the price level. Oil prices actually fell. It looks like Brookfield will make it out of this in one piece. So, I’m content to keep holding my Brookfield shares — I may even add to the position where appropriate.
