Valued at $2.1 billion by market cap, Brookfield Business Partners (TSX:BBU.UN) has underperformed the broader markets since its initial public offering in June 2016. In the last eight years, Brookfield Business Partners stock has returned 34% to shareholders and currently trades over 30% below all-time highs.
Brookfield Business is a business services and industrial company. It owns and operates providers of essential products and services across sectors such as industrial, infrastructure services and business services. Brookfield acquires high-quality businesses and applies its investing and operational expertise to create value with a focus on profitability. Basically, it acquires market-leading providers of essential services and adds value through operational improvements.
With more than US$81 billion in total assets, Brookfield Business has a global presence and remains a top investment choice right now. Let’s see why.
Is Brookfield Business Partners a good buy?
The underperformance of Brookfield Business Partners is surprising. Between 2016 and 2024, increased adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) by 37% annually, as margins have widened from 4% to 20% in this period.
In the last eight years, it has acquired more than 20 businesses and realized a 20-times average multiple of invested capital. To date, the company has invested US$9 billion in total capital, with cumulative proceeds totalling US$6 billion.
Its portfolio of businesses includes the following:
- The largest residential mortgage insurer in Canada, operating in an oligopoly.
- A company that provides software to 70% of large-scale auto leaders in North America.
- One of three global providers of lottery services with a 70% share in core product offering.
- A leader in advanced automotive batteries with 80% profitability generated from recurring aftermarket demand.
- A leading provider of engineered components for equipment providers.
A strong start to 2024
In the first quarter (Q1) of 2024, Brookfield Business Partners reported an adjusted EBITDA of US$544 million. Its EBITDA margin increased to more than 20% due to the ongoing performance of its largest operations.
Brookfield believes owing high-quality businesses is a key differentiator of earnings quality across market cycles. In addition to its strong performance in Q1, it generated US$300 million from capital-recycling initiatives.
It ended Q1 with US$1.6 billion in corporate liquidity tied to cash, credit facilities, cash flows from operations, and the monetization of mature businesses.
Brookfield’s business services segment reported an adjusted EBITDA of US$205 million. Its residential mortgage insurance business performed well, as Canadian home prices have been resilient amid low unemployment, both of which have contributed to relatively low mortgage delinquencies.
Brookfield stated that as borrowers adjust the impact of higher mortgage rates, new insurance premiums written in Q1 increased year over year. Moreover, it states that the sales-to-new listing ratio, a key housing indicator, is trending toward a seller’s market. Brookfield expects this business to generate between US$150 million and US$200 million of cash distributions.
Additionally, due to operational improvement plans, the annualized run rate EBITDA of its dealer software and tech services operation increased by over 40%.
Due to its stellar performance and widening profit margins, analysts covering the TSX stock expect shares to surge by 50% in the next 12 months.
