Brookfield Asset Management: Inflation-Linked PlayMay 20, 2021
🚀 Know The Company
Market Sector: Financial Services
Market Segment: Asset Management
Products: World’s leading alternative asset manager
Scope Of Activity: Owns and manages renewable power, real estate, and infrastructure assets
Competitors: Blackstone, Carlyle Group, KKR
Brookfield Asset Management is a top choice if investors wish to play the low interest rate plus inflation trend. Brookfield invests in hard assets whose valuations are bound to rise due to the current monetary policies around the world. A historically low interest rate regime would indicate that inflation will pick up. That would translate to the prices of hard assets like real estate and power going up. Brookfield’s valuation is also not too extreme and it has a long track record of owning and operating alternative assets successfully. Plus, the transition to renewable energy is also a tailwind for Brookfield’s substantial renewable energy portfolio.
🔑 Key Takeaways
- Brookfield is one of the world’s largest alternative asset managers with more than $600 billion in assets under management (AUM). Alternative assets are those other than stocks and bonds. Brookfield manages a large portfolio of renewable energy, real estate, infrastructure, data center, and healthcare assets. Since these assets are core components of every economy, they tend to perform even during downturns, pandemics, and recessions.
- Over $300 billion of Brookfield’s capital is fee-bearing. It means that such investments are earning Brookfield a fee revenue. More than half of the $600 billion in AUM is based in the US. Europe and the Middle East is the second-largest region with over $100 billion in AUM, while Asia-Pacific is at number 3 on the list.
- The private equity segment of Brookfield’s business is the largest revenue contributor. Infrastructure and real estate are also major revenue contributors.
🐮 Bulls Say / 🐻 Bears Say
🐮 Bulls Say:
- BAM is actively buying back their own shares, which on its own, financially engineers the stock price to only go up. Factor in their leading capabilities, and it is a no brainer.
🐻 Bears Say:
- While inflation linked stocks are hot right now, the thing is no one can predict inflation - not even the federal reserve! So should inflation fears start calming down, these types of stocks are subject to severe swings in the opposite direction.
📊 By The Numbers
- Assets Under Management: For any asset manager, the number one metric is the AUM. Investors would want to know how many assets the firm manages and whether that number is growing. Brookfield’s AUM has jumped from a mere $20 billion in 2002 to $550 billion in 2020. Over the past 5 years, the AUM has grown at a CAGR of 26%.
- Interest Rates: Investment-focused companies like Brookfield are significantly affected by interest rates. In general, if interest rates go down, the bond yields also go down and investors look for more attractive opportunities to earn a better return. So, stocks like Brookfield see more demand pushing prices up. Similarly, if interest rates go up, then investors shift away from equities and towards “lower risk” bonds as they can earn a decent return without taking a higher risk. Additionally, it is cheaper for Brookfield to borrow when interest rates are down and more expensive when rates are up. So, a lower interest rate is a major positive for Brookfield.
- Number of Investors: If Brookfield is to manage assets, it needs institutional investors to supply the capital to buy and operate those assets. Institutional investors are those that bring in a large amount of capital. Over the past decade, Brookfield has grown its institutional client base more than 20X.
- Distributions: Investors who hold stocks for the purpose of earning a yield will focus on the distributions offered by such stocks. Brookfield Asset Management’s business model is focused on generating free cash flows from its investments in real assets and distributing them out. So, the distributions paid out to common stockholders are an important metric. In the case of Brookfield, dividends have increased every single year throughout the past decade.
🔎 Stock Profile
Because of its size, Brookfield Asset Management has the ability to raise capital cheaply and quickly. It can, therefore, move adeptly and acquire real estate, infrastructure, and renewable energy assets at fire-sale prices. Such acquisitions contribute to the long-term growth of Brookfield and allow it to further diversify its geographical base, asset family, and cash flow.
The long-standing existence of Brookfield gives it vital know-how in the investment industry. Brookfield Asset Management has the experience of investing and managing assets for over 115 years. It has done business in over 30 countries. This has allowed the company to build networks and expertise across industries and geographies, something that only a few other large rivals can match.
📈 Growth Opportunities
Funds flowing into alternative assets have been growing over the last couple of decades. This trend is expected to continue into the future as well.
Secondly, there is large-scale decarbonization of the power grid playing out across several regions of the world. Commitments like the Paris Climate Agreement of 2015 are making governments and regulators take action towards building up renewable energy. Brookfield is well-positioned to leverage such opportunities with its long-standing experience in the renewables space.
Brookfield Asset Management currently trades at a P/E of 43 vs a 5-year average of close to 30. The P/B (price-to-book) ratio is 2.3 as opposed to a 5-year average of 1.75. The dividend yield on offer currently is 1.08% as compared to a 5-year average yield of 1.36%. So, the valuation ratios indicate that the stock is valued at a premium albeit a small one.
Brookfield’s stock has been trading in a tight range of $44 to $46 over the past couple of months. A breakout above $46 would be a good place to go long. A breakdown below $44 would indicate a wait-and-watch signal.
Target Price: $60
Target Date: 16 Months
Market Cap: ~$74 Billion
Current Price (May 20, 2021): $49