Brookfield Asset Management (TSX:BAM) is Canada’s biggest “pure-play” asset manager. Unlike the big banks, it devotes 100% of its resources to managing clients’ wealth. This gives it unique strengths and a much better compounding track record than most of the banks‘ wealth management divisions can boast. Over the years, BAM has compounded its investments at something like 16% CAGR (icompounded annual growth rate). This means that its investments have outperformed the S&P 500, the “Holy Grail” of investment benchmarks.
This has all been great news for Brookfield insiders and investors, but does it make Brookfield Asset Management itself a good buy? Brookfield Asset Management only split off from its parent company Brookfield (TSX:BN) a couple of years ago. It does not have a very long track record as a standalone public company; accordingly, historical financials are hard to access. They can be accessed by looking at old Brookfield Corp’s annual reports from back in the days when the whole combined company was called “Brookfield Asset Management.” However, the BAM-specific metrics have to be isolated from those of the company as a whole, which is a labour-intensive process.
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The case for buying BAM stock now
A case for buying BAM stock today can be built on the company’s high profit margins. In the most recent 12-month period, BAM delivered the following metrics:
- A 74% gross profit margin.
- A 64% operating profit margin.
- A 45% net profit margin.
- A 26% free cash flow margin.
All of these profit margins are among the highest you will see in a large company anywhere. For a refresher, the concepts involved are as follows:
- Gross profit: revenue minus direct selling costs (i.e., sales commissions).
- Operating profit: earnings before interest and taxes.
- Net income: profit as defined by the Financial Accounting Standards Board.
- Free cash flow: an all-cash measure of profitability or dividend-paying ability.
The case for waiting
A case for not buying Brookfield Asset Management right away can be built on the fact that the company is fairly richly valued. At today’s prices, BAM trades at the following:
- 30 times earnings.
- Four times sales.
- 1.8 times book value.
- 11.5 times operating cash flow.
This is pretty expensive for a financial services company. Granted, most financial services companies aren’t as profitable as Brookfield Asset Management. However, the company trades at a premium even to similar companies like KKR, Carlyle, and Apollo. There’s a case to be made for investing in a similar but cheaper company.
What I did
Because Brookfield Asset Management is both very profitable and pretty expensive, I opted to invest in its parent company, Brookfield, instead. Specifically, I held both stocks for a time, sold BAM at a 20% profit, and then invested the proceeds into BN. Brookfield owns 75% of BAM anyway, so I still have some exposure. In the meantime, I also have exposure to Brookfield’s profitable and growing insurance subsidiary, and its many partnerships.
So, while I sold my Brookfield Asset Management shares, I still hold a stake in the company in a sense. A much more diversified “stake” in the form of Brookfield Corp shares. It’s a win-win situation.
