For a company with a market cap of $87 billion, I bet most investors aren’t familiar with Brookfield Asset Management (BAM, Financial). The company is a leading global alternative asset manager with approximately $690 billion of assets under management involving real estate, infrastructure, renewable power, private equity and credit. The company’s sole objective is to generate attractive long-term risk-adjusted returns for the benefit of their clients and shareholders.
The company manages a wide range of public and private investment products and services for institutional and retail clients. Revenues are derived from asset management income for managing these investments, and the company often invests in these projects themselves. The company usually has comprehensive access to large-scale capital sources enabling them to make investments in sizeable, premier assets and businesses across geographies and asset classes that few asset managers are able to accomplish.
Brookfield’s predecessor companies became public and began trading on the Toronto Stock Exchange in 1902. The present day Brookfield Asset Management began trading on the TSX in August 1997 and the NYSE in December 2000. Brookfield manages and invests in five distinct segments.
Renewable power and transition
The company is one of the world's largest investors in renewable power, with approximately 21,000 megawatts of generating capacity. The assets are located in North and South America, Europe, India and China. The investments and assets managed are further diversified across technologies and include hydro, wind, utility-scale solar, distributed generation, storage and other renewable technologies.
Infrastructure
Brookfield is a large infrastructure investor and owns or operating assets across the utilities, transport, midstream and data sectors. This includes assets such as railroads, pipelines and shipping ports.
Private equity
The company is a large private equity investor with approximately $103 billion in assets under management. The strategy in this segment is focused on acquiring high-quality businesses with barriers to entry and enhancing their cash flow capabilities by improving strategy and execution.
Real estate
Brookfield is one of the world's largest real estate investors. The company owns, operates and develops iconic properties around the world and includes office, retail, multifamily, logistics, hospitality, land and housing, triple net lease, manufactured housing and student housing assets on five different continents.
Credit and insurance solutions
This segment is primarily operated through its 62% interest in Oaktree Capital Management. In 2019, Brookfield acquired a majority interest in Oaktree, and it continues to operate as a standalone business. Oaktree was founded by legendary value investor Howard Marks (Trades, Portfolio).
Financial results
During 2021, Brookfield recorded its best financial results in its history. Revenues increased 20.6% to $75.7 billion. Net income was $12.4 billion compared to only $707 million in the prior year. The company operates with complex capital and a large variety of partnership interests, so of that $12.4 billion, $3.9 billion was attributed to shareholders and the remainder was attributed to other non-controlling interests.
The company raises significant amounts of capital with inflows of $27 billion during the fourth quarter and $71 billion for the full year. Fee-bearing capital now totals $364 billion, an increase of approximately $53 billion compared to 2020. This contributed to a 33% increase in fee-related earnings compared to the prior year. The largest contributor to funds from operation (FFO) was the asset management segment, followed by the private equity business.
As of Dec. 31, 2021, the company had $92 billion of capital available to deploy into new investments.
Valuation
The complexity of the organizational structure of the Brookfield makes valuation difficult to calculate and compare to competitors. The company uses metrics such as distributed earnings, funds from operations, equity account income among others.
In complex situations like this, one can resort to a simplistic but meaningful valuation metric of where the company is trading compared to the value of its net assets. The company’s tangible book value per share at year end was $51.44, so Brookfield's stock is selling at just 1.07 times book value per share.
The company recently declared an 8.0% increase in the quarterly dividend to $0.14 per share (representing $0.56 on annual basis). This equates to an dividend yield on the common stock of approximately 1.00%.
Guru trades
Gurus who have added to their Brookfield positions include Chuck Akre (Trades, Portfolio), Ken Fisher (Trades, Portfolio) and Ron Baron (Trades, Portfolio). Gurus who have reduced their positions include Third Avenue Management (Trades, Portfolio) and Arnold Van Den Berg (Trades, Portfolio).
Conclusion
Brookfield is likely undervalued in my view with the stock trading at close to book value. With the addition of Oaktree Capital contributing to distributable earnings and the asset management representing a large portion of future earnings, I believe Brookfield's stock should be trading well above book value. The company’s primary focus of generating risk-adjusted returns for shareholders should provide above-average market returns over the long-term. Further, with $92 billion in capital for deployment, I expect the company to take advantage of distressed assets in the next economic downturn.
