Brookfield Asset Management (TSX:BAM) and Brookfield (TSX:BN) are two of Canada’s most popular asset management companies. The former is a pure play asset manager, while the latter is a part-owner of the former, and also a conglomerate that manages its own assets.
When you buy Brookfield, you are also indirectly buying BAM, as the former owns 75% of the latter. This might seem like it makes Brookfield better, since it gives you a lot of BAM in a more diversified package. However, things aren’t as simple as they seem. Because Brookfield has other assets on its balance sheet, its risk characteristics are different than those of BAM. In fact, Brookfield has more financial risk than BAM does, as measured by default risk. For this reason, Brookfield and BAM are not equivalent at all, and there’s actually a strong case to be made that BAM stock is the better buy.
The case for Brookfield Asset Management
The case for buying Brookfield Asset Management instead of BAM is its asset-light business model.
Brookfield Asset Management has very few assets and very little debt. As proof of this, we can look at some select metrics from its most recent balance sheet:
- $3.2 billion in assets.
- $783 million in accounts payable, which is also the sum total of liabilities.
- No long term debt.
Note that the figures above refer to the portion of BAM assets owned by common shareholders. The whole company technically has $12.9 billion in assets, but Brookfield reports the public portion of BAM’s shares separately from its own.
In fiscal 2022, Brookfield Asset Management delivered $2.1 billion in distributable earnings to common shareholders. So, it’s doing about 66% of the amount of its assets in annual earnings!
Why is this a good thing?
Because companies that do a lot of earnings with little assets are generally less risky than those that have many assets. First, assets usually come with liabilities; they may have been bought with debt, they require maintenance and upkeep, they may need to be replaced, and so on. All of this creates recurring expenses, which you want to keep low. Second, because Brookfield has few assets to think about, its management can focus more intensely on its core business of generating management fees. So, the company can benefit from a kind of “deep focus.”
The case for Brookfield
The case for Brookfield compared to Brookfield Asset Management stock comes down to valuation. At today’s prices, Brookfield trades at:
- 10.6 times forward earnings
- 0.6 times sales
- 1.3 times book value
- 6.2 times operating cash flow
By contrast, BAM trades at:
- 22 times earnings.
- 3.5 times sales.
- 1.4 times book value.
Brookfield is, overall, a much cheaper stock. Unfortunately, it’s pretty easy to explain why that’s the case: BN is far riskier than Brookfield Asset Management. Just recently, it defaulted on $161 million worth of debt related to office buildings. Because of the default, lenders will demand higher interest rates if they are to lend to Brookfield again. Its cost of capital will increase. This is the risk with asset-heavy businesses: they usually have a lot of debt, and debt can cause problems. It’s a risk to keep in mind. On the whole, Brookfield Asset Management is a better business than Brookfield.
