Brookfield (TSX:BN) and Brookfield Asset Management (TSX:BAM) are the two biggest players in the vast Brookfield empire. The former is a financial holding company, while the latter is a pure-play asset manager. Each business has its pros and cons. BN’s stock is generally cheaper, while BAM has higher profit margins. There is a case to be made for holding both. In this article, I will explore Brookfield and BAM side by side to decide which B-stock is right for you.
The case for Brookfield
Brookfield has several advantages over its smaller cousin. These include:
- More diversification (asset management, insurance, private equity and credit for BN, vs. just asset management for BAM)
- Room to grow in the insurance business, which is small and growing rapidly
- A discount to net asset value
- Overall cheapness
- More leverage (this is a good thing when investments are chosen well and risks managed well)
These are significant advantages that Brookfield Asset Management simply does not possess. Because Brookfield Asset Management simply collects fees and passes most of them onto shareholders, it leaves little room for compounding. So, although BN’s leverage makes it riskier than BAM, it has much more room to grow in a “best case scenario.”
The case for Brookfield Asset Management
The case for Brookfield Asset Management rests on the fact that it is far more profitable than its parent. In the trailing 12-month period, BAM had the following profitability metrics:
- 77% gross profit margin
- 68% operating margin
- 48% net margin
- 24.8% return on equity
No matter which way you look at it, this is a very profitable company. By contrast, BN has a mere 0.12% net margin.
On the flipside, BAM stock is much more expensive than Brookfield stock. At today’s prices, it trades at:
- 30 times earnings
- 3.9 times sales
- 1.7 times book value
All this while Brookfield trades at a mere 8 times forward earnings, 0.7 times sales and 1.6 times book value. To be sure, Brookfield Asset Management is growing faster than its parent company is, with revenue up 29% in the trailing 12-month period. However, some of Brookfield Corp’s smaller business units, like insurance, are growing at breakneck paces. Should they continue growing rapidly, they may come to represent a large percentage of the whole company in the future, and lead to revenue acceleration on a whole-firm basis.
Brookfield stock: Foolish takeaway
The bottom line on Brookfield, collectively, is that the organization has many good securities to choose from. BN, BAM, various partnerships, REITs and preferred shares. Investors have many ways to get a piece of the action.
Me personally, I favour BN over BAM right now. I think that BAM is essentially the higher-quality business, but with BN trading at a discount to its net asset value, it has more upside if things work out well. And work out well they just might! Brookfield has a great reputation, being described as “well run” by the legendary Howard Marks. Also, it has several strong businesses under the hood, giving it significant operational diversification. On the whole, it looks extremely promising. BAM looks promising too, but the opportunity there is somewhat “priced in” to the shares.