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Brookfield (TSX:BN) is one Canadian company that is making a splash on the global stage. Doing deals with Microsoft, the Government of Qatar and many other large institutions, it is a global player. The company is also seeing a lot of interest from global investors. For example, Bill Ackman of Pershing Square Capital recently took a position in it.
Earlier this year, I wrote about Brookfield pretty frequently. In particular, I wrote articles focusing on its discount to net asset value (NAV), an alternative way of computing book value. Since that time, BN stock has risen considerably in price and is no longer trading at a massive “discount.” However, it is still a very promising company that stands to gain immensely from falling interest rates. In this article, I explore several reasons why Brookfield is still an intriguing buy despite all the gains.
Falling interest rates
Interest rates are falling in both the U.S. and Canada. The Bank of Canada has done three 25 basis point cuts, while the U.S. Fed recently did a single 50 basis point cut (a basis point is 0.01%). These hikes might not appear large but remember that when you go from 5% interest rates to 4.5%, the 0.5% bps decrease is actually a 10% decrease in interest expense. So, relatively “small” rate cuts can have a big impact on companies’ earnings.
Brookfield is a major beneficiary of this. With $335 billion in debt, it could experience a massive decrease in interest expenses as a result of the Fed and Bank of Canada’s interest rate cuts. In fact, the variable rate portion of the company’s debt is likely already getting cheaper – we’ll see for sure when the company’s next earnings release comes out. The fixed rate debt will also get cheaper when it comes up for refinancing.
Valuation
Another factor that Brookfield has going for it right now is a cheap valuation. While I can’t say for sure that BN’s previous “discount to NAV” still exists, it does have some relatively low multiples, including:
- 13.5 times forward earnings (“forward earnings” means analysts’ estimate of the next 12 months’ earnings).
- 0.8 times sales.
- 1.9 times book value.
- 13.6 times operating cash flow.
These are fairly modest multiples. And they should come down if the company keeps growing.
Growth
Speaking of growth, Brookfield has some pretty solid growth numbers in some categories. Over the last five years, it has grown at the following compounded annual (CAGR) rates:
- Revenue: 8%.
- Operating income: 7.8%.
- Total assets: 11.7%.
- Net income: -21.5%.
While this might not look like explosive growth, remember that the company’s net income was impacted by the spinoff of 25% of Brookfield Asset Management to shareholders, and its distributable earnings (DE) are much higher than its reported earnings. Using DE in place of earnings, Brookfield is growing – especially its insurance subsidiary.
My verdict: Buy
On the whole, I think Brookfield is still a decent buy today. It’s not quite the no-brainer it was when it traded at a large discount to NAV, but it still has considerable value under the hood.
