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Brookfield Corporation (TSX:BN) is one of Canada’s most successful financial services companies. It might not be a household name, but it is quite familiar to those “in the know.” The company is involved in asset management, insurance, private equity, renewable power and infrastructure. In several of these business activities, it is a world-class competitor. For example, its renewable subsidiary recently inked a deal to provide Microsoft with 10.5 gigawatts of clean power over a period of four years. This amount of clean power could sell for anywhere between $2.2 billion and $13 billion, which goes to show that Brookfield is a major player in the global renewable energy space.
The question for investors today is, how long can this go on for? While Brookfield has certainly been having success in recent years, it is not a foregone conclusion that it can continue indefinitely. Much of Brookfield’s recent success has been attributed to the leadership of Chief Executive Officer (CEO) Bruce Flatt, who turns 60 this year. While it’s not uncommon for corporate CEOs to stay on well into their seventies, the question of whether Flatt will soon retire is one worth asking.
In this article, I will explore Brookfield’s business and attempt to determine where its stock will be in 10 years.
Performance
Brookfield Corp has been performing well in recent quarters. In its most recent quarter, it delivered the following results:
- Revenue of $19.4 billion, down 25% (this apparent negative is actually a positive, as I’ll explain shortly).
- $1.6 billion in distributable earnings, up 23%.
- $5.6 billion in full-year cash flow, up 9.8%.
Overall, these results exceeded analyst expectations and triggered a sizeable rally in BN stock the day they were released.
Now for a note on revenue: the decline came from selling off business units that were not as profitable as other BN businesses. As a result of the sales, Brookfield realized an increase in net income on lower revenue. So, the decline in revenue reflected improved capital allocation, not declining sales in continuing businesses.
Future prospects
Based on recent trends in its businesses, it would appear that Brookfield’s future prospects are as good as its past performance.
First, the company is increasingly international, doing deals in Qatar, the United Arab Emirates, Europe, and Japan. This means it is positioning itself in markets where assets can be acquired more cheaply than in the very pricey U.S. market, pointing to the possibility of good future returns.
Second, Brookfield retains its talented leadership team. While Bruce Flatt is nearing retirement age, he may choose to stay on longer than most people do. Also, his lieutenant, Conor Teskey, is almost as well-regarded as Flatt himself and is clearly passionate about Brookfield.
Lastly, Brookfield Corp is reasonably modestly valued today, trading at 20 times distributable earnings.
When you take all of the above advantages and consider that most of the risks Brookfield faces (i.e., debt) are well managed, it looks like Brookfield has another solid 10 years ahead of it. Overall, I expect good things from the company in this period.
