2-for1 Sale
Brookfield (TSX:BN) stock is one of the most admired Canadian equities on the global stage. Owned on and off by investors like Mohnish Pabrai, Josh Tarassoff, and Chuck Akre, it has a great reputation. Brookfield is one of the world’s biggest alternative investment managers, and it is gradually building itself into a diversified financial conglomerate.
With operating businesses in real estate and insurance, Brookfield has grown beyond its origins as an asset manager. Investors still think of it as an asset manager, but it’s so much more. It’s precisely for this reason that its stock is attractive today. Brookfield’s insurance subsidiary is seeing significant growth, yet BN stock is priced very much like a value name.
If Brookfield succeeds in scaling its insurance business, then it could eventually ramp up growth in the company as a whole. It’s for this reason — i.e., the combination of a cheap valuation and potential future growth — that I consider BN stock a buy today.
Brookfield stock is cheap
Going by valuation multiples, Brookfield stock is pretty cheap. At today’s prices, it trades at
- 19 times next year’s estimated earnings;
- 0.54 times sales;
- 1.3 times book value; and
- 7.5 times operating cash flow.
This valuation is definitely on the cheaper side of things. And the company may be even cheaper than it appears! Brookfield has a 1.3 price-to-book ratio, according to various financial data platforms, but the company itself says that its net asset value (NAV) per share is much higher than its share price.
The company does not say exactly what its NAV is — at least not in the document that I got the statement from. However, some writers have worked out that BN’s NAV per share may be as much as double the current stock price. If these estimates are correct, then Brookfield should deliver considerable upside eventually.
It has to be mentioned, though, that this company reports and estimates its own asset values. Some say that self-reported fair value estimates are not to be trusted. Indeed, fund managers have an incentive to give high estimates. That doesn’t mean that Brookfield is definitely doing so, but it’s a point to keep in mind.
Significant growth potential
A big advantage of Brookfield compared to other “value” stocks is the fact that it has significant growth potential. Specifically, it has growth potential in its insurance segment. Brookfield founded that subsidiary very recently, and it has been growing quickly. Last quarter, distributable earnings from the segment grew at 245% year over year. In the same quarter, Brookfield bought out American Equity — an insurance company — for $4.3 billion. The deal should add considerable earnings power to Brookfield Insurance.
One risk to be aware of
Despite all the positive things I’ve written about Brookfield in this article, there is one serious risk that investors have to keep in mind: interest rates.
Brookfield is a highly leveraged company, with about five times more debt than shareholder equity. With such large amounts of debt comes high interest expenses.
Last quarter, Brookfield’s interest expenses increased by $1.4 billion, partially due to rising interest on variable-rate debt. If central banks continue hiking interest rates, as they have been doing for most of the last year and a half, Brookfield’s earnings may decline. So, BN shareholders will want to keep a close eye on the situation with interest rates.
