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Brookfield Corporation
September 2, 2024
FOLLOW-UP
September 26, 2024 | Total Return: +4.12%
ORIGINAL ARTICLE
FREE & PREMIUM
Brookfield Corporation
Ticker: BN.NYSE
Addition to:
✅ SENSU Watchlist
Addition Date: September 2, 2024
Price per Share: 50.28 USD
TABLE OF CONTENTS
THE COMPANY
Brookfield’s story begins in Brazil in 1899, when a group of investors formed the São Paulo Railway, Light and Power Company to provide electric power and streetcar services to São Paulo.
In the early 20th century, the company expanded into Canada, establishing hydroelectric facilities and streetcar systems in several cities. It was during this period that the name "Brascan" emerged - a portmanteau of "Brasil" and "Canada" reflecting the company's dual roots. For decades, Brascan focused primarily on Brazilian investments and Canadian utilities.
The 1970s marked a pivotal shift as the company began diversifying beyond its traditional sectors. Under the leadership of visionary executives like Jack Cockwell, Brascan ventured into real estate, acquiring significant properties in New York and London. This move into property development and management would prove transformative, setting the stage for Brookfield's future as a real asset specialist.
The 1990s and 2000s saw accelerated expansion and a refinement of Brookfield's business model. In 2005, the company rebranded as Brookfield Asset Management, signaling its evolution into a global alternative asset manager. What fascinates me about this period is how Brookfield honed its strategy of acquiring undervalued assets, improving their operations, and creating value through active management.
Brookfield's approach centers on several key pillars that I find particularly compelling. First, the company focuses on real assets - things like office buildings, shopping malls, ports, pipelines, and renewable energy facilities. These tangible assets provide essential services and tend to appreciate over time, offering a hedge against inflation.
Secondly, Brookfield employs a contrarian, value-oriented investment philosophy. They often target assets or sectors that are out of favor, acquiring them at attractive prices when others are selling. This requires patience and a long-term outlook, but it has repeatedly paid off for the company.
Another aspect of Brookfield's model that intrigues me is its emphasis on operational expertise. Unlike some asset managers who simply allocate capital, Brookfield takes an active role in managing and improving the assets it acquires. With over 180,000 operating employees worldwide, they have deep industry knowledge across their focus areas.
The company's structure as both an asset manager and operator creates a virtuous cycle. Their operational experience informs investment decisions, while their investment activities provide opportunities to apply and expand their operational capabilities. This synergy between investing and operating sets Brookfield apart from many peers.
Brookfield's growth has been further fueled by its ability to attract third-party capital. By establishing various listed and private investment vehicles, they've been able to scale their operations dramatically. This allows them to pursue larger deals and diversify across geographies and sectors while earning steady fee income.
I'm impressed by how the company has navigated changing market conditions and seized emerging opportunities. For instance, their early move into renewable energy positioned them well to capitalize on the global shift towards sustainable infrastructure. Similarly, their expansion into areas like data centers and logistics reflects an astute reading of economic trends.
The company's global reach is another factor that stands out to me. From its roots in Brazil and Canada, Brookfield has built a truly international platform with operations spanning the Americas, Europe, Asia, and Australia. This global footprint not only provides diversification but also allows them to identify and act on opportunities across markets.
In recent years, Brookfield has continued to innovate and expand its capabilities. The launch of Brookfield Reinsurance in 2021 opened up new avenues in the insurance sector. Meanwhile, the creation of a dedicated Global Transition Fund underscores their commitment to sustainable investing and decarbonization efforts.
As of 2023, Brookfield Corporation represents the asset management arm of the broader Brookfield ecosystem. This structure allows for greater focus and transparency around the company's fee-generating asset management activities.
STOCK PRICE
The dynamic background color reflects overall market valuation, allowing you to quickly assess both stock-specific trends and market conditions at a glance.
Why logarithmic? It displays percentage changes uniformly, making price movements easily comparable across different ranges. A 100% increase appears the same whether from $10 to $20 or $100 to $200.
FINANCIAL ANALYSIS
⭐⭐⭐ Quality Score | ⭐⭐⭐⭐ Value Score | ⭐⭐⭐⭐⭐ Growth Score |
Analyzing Brookfield Corporation reveals a complex picture of a high-quality company with both promising trends and valuation concerns. The company's P/B ratio has declined from 1.63 in 2021 to 1.37 in 2023, suggesting the stock has become relatively cheaper on a book value basis. However, this is juxtaposed against a significant drop in earnings yield from 16.4% to 1.8% over the same period, indicating a major compression in earnings relative to price. The current P/E ratio stands at a lofty 51.6x, well above historical levels.
Price-to-Book Ratio
Earnings Yield
On the positive side, Brookfield's profitability metrics show improvement, with Return on incremental Invested Capital (ROIIC) increasing from 2.19% over 10 years to 4.16% over 3 years. This trend suggests better capital allocation and growing profitability in recent years.
10-Years | 5-Years | 3-Years | |
|---|---|---|---|
ROIIC | 2.19% | 1.42% | 4.16% |
Ranking | 50.09% | 52.06% | 55.87% |
The company's commitment to shareholder returns is evident in its share buyback program, with a buyback ratio of 3.56% as of September 2024. Additionally, Brookfield's substantial EBITDA of $29 billion and capex of $10.2 billion indicate significant investment in future growth.
Despite these positive indicators, Brookfield's current valuation appears rich based on earnings metrics. The high valuation could be justified if the recent earnings compression proves temporary, if heavy capex spending translates into strong future growth, or if the improving ROIIC continues its upward trajectory.
MANAGEMENT ANALYSIS
Bruce Flatt is the CEO of Brookfield Corporation, a position he has held since 2002. A native of Manitoba, Canada, Flatt joined Brookfield in 1990 and quickly rose through the ranks, becoming known for his sharp investment acumen and long-term vision. Under his leadership, Brookfield has grown from a small Canadian real estate company into a global alternative asset management powerhouse with over $900 billion in assets under management.
Flatt is renowned for his contrarian investment style, often making bold moves during market downturns that have paid off handsomely over time. His patient, value-oriented approach has earned him comparisons to Warren Buffett. An interesting fact about Flatt is that despite his immense success and wealth, he still flies economy class and is known for his modest lifestyle. This down-to-earth attitude reflects Brookfield's culture of careful stewardship of capital and aligns with Flatt's belief in thinking and acting like an owner in all decisions.
Meet the Employees: Reviews
Employees consistently praise the company for its intellectually stimulating environment, populated by smart, driven professionals. The firm's global reach and involvement in complex, large-scale deals provide ample learning opportunities and exposure to high-level business operations. Many reviewers highlight the potential for rapid career advancement, with some reporting promotions from manager to VP level within five years. The company's financial strength and market position are viewed positively, giving employees confidence in job stability and future prospects. Compensation is generally described as competitive, with good benefits packages including health insurance and retirement contributions. The office locations, particularly in major financial hubs, are often cited as a perk, with some mentioning beautiful views and modern facilities.
However, Brookfield's work culture appears to be a double-edged sword. The high-pressure, fast-paced environment that drives the company's success also leads to complaints about work-life balance. Long hours, including weekends, are frequently mentioned as a significant drawback. The company's strict in-office policy, with little to no flexibility for remote work, is a common grievance, especially in the post-pandemic era. Some employees describe the culture as outdated, citing a formal dress code and rigid hierarchical structure. There are recurring mentions of office politics, favoritism, and a lack of diversity, particularly at senior levels. Career progression, while possible, seems to be inconsistent across departments, with some employees feeling stuck or overlooked for promotions. The company's approach to performance reviews and bonuses is criticized by some as opaque or unfair. Several reviews point to a disconnect between upper management and lower-level employees, with concerns about tone-deaf leadership and a lack of responsiveness to employee feedback.
“Very high calibre colleagues, challenging work, good pay. Long hours, but generally not many [cons].”
“Above average compensation and benefits. Have to work in office 100%. Lack of social/team engagement.”
MOST SIGNIFICANT MOATS
Brookfield operates in over 30 countries across five continents, giving it unparalleled global presence in the alternative asset management space. This extensive network allows Brookfield to identify unique investment opportunities worldwide that may be inaccessible to smaller or more geographically limited competitors. The company's global footprint also provides diversification benefits and the ability to allocate capital to the most attractive markets and sectors at any given time.
With $149 billion of invested capital and approximately $5 billion in annual free cash flow, Brookfield has a massive and stable capital base. This allows the company to pursue large, complex deals that many competitors simply cannot. The perpetual nature of much of this capital also gives Brookfield patience and flexibility in its investment approach, enabling it to weather market cycles and take a truly long-term view.
Brookfield's diverse yet interconnected business segments create powerful synergies. The company's asset management, insurance solutions, and operating businesses all benefit from being part of the broader Brookfield ecosystem. This allows for information sharing, deal flow, and operational expertise to flow between different parts of the organization, creating a whole that is greater than the sum of its parts.
MOST SIGNIFICANT RISKS
Risk: Significant increases in interest rates could negatively impact Brookfield's business.
Impact: Higher interest rates increase borrowing costs, potentially reducing profitability and returns. They may also decrease asset valuations, particularly for real estate investments.
Mitigating Factor: Brookfield uses a conservative approach to leverage, with most debt at the asset level rather than corporate level. They also utilize long-term, fixed-rate financing where possible.
Risk: Adverse changes in global economic conditions or financial markets could hurt Brookfield's business.
Impact: Economic downturns or market volatility may reduce investment opportunities, decrease asset values, and make it harder to raise capital or sell investments.
Mitigating Factor: Brookfield's diverse global portfolio across multiple sectors provides some protection against localized economic issues. Their focus on essential infrastructure and real assets also tends to be more resilient during downturns.
Risk: Changes in laws, regulations or political climates in countries where Brookfield operates could negatively impact business.
Impact: New regulations might increase costs, restrict operations, or reduce profitability. Political instability could threaten investments in certain regions.
Mitigating Factor: Brookfield's global presence helps spread this risk. They also engage in active dialogue with regulators and closely monitor political developments in key markets.
CATALYSTS FOR GROWTH
The expected closing of the American Equity Life (AEL) acquisition should significantly expand Brookfield's insurance assets from $60 billion to over $100 billion. This could boost annualized earnings in the insurance business from $940 million to $1.3 billion, providing a substantial and stable earnings stream.
Management expects to be more active in selling mature assets as capital markets improve. With $10 billion in accumulated unrealized carried interest, successful exits could generate significant performance fees.
The company plans to buy back $1 billion of shares in the coming months if prices remain reasonable. This could support the stock price and increase per-share value for remaining shareholders.
Disclaimer: The information provided in this newsletter is for educational and informational purposes only and does not constitute financial, investment, or legal advice. The content is solely the opinion of the author, who is not a qualified financial advisor, investment professional, or legal expert. All investments involve risk, and past performance does not guarantee future results. You should conduct your own research and consult with a qualified financial advisor before making any investment decisions. The author of this newsletter is not liable for any losses or damages arising from the use of the information provided. This newsletter is not intended for distribution to, or use by, any person in any jurisdiction where such distribution or use would be contrary to local law or regulation.
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