Opinions
Marc-Andre Gaudreau
Brookfield Asset Management Inc (A)
BAM.A-T
TOP PICK
Sep 19, 2012
Stock price when the opinion was issued
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The most pure play exposure to fee-related earnings. Fee-related earnings on third-party capital are the most highly valued and sought-after part of the alternative asset managers. About 25% is exposed to real estate, but it's over-exposed (relative to a BX) to infrastructure and credit, which should do pretty well in an inflationary environment. Infrastructure inflation escalators will continue to hold in. Opportunities in credit, with the carnage we've seen in markets. Good environment when you have capital to deploy, and it just raised $15B. Yield is 4.14%.
(Analysts’ price target is $49.37)BAM, but he'd be wary of both right now because of the office side. BAM was spun out and it's largely private equity. Concerns him because it doesn't get revalued as frequently as publicly traded stocks. With interest rates having risen as much as they have, and potential economic weakness, there might be a risk to valuation. Public equity is a black box, so he's wary.
BAM was the parent before the spin-off. Now, BN is the parent that owns the various entities. So now the new BAM is a fee-related earnings business that pays a 4% dividend yield, It boils down to BAM having the yield vs. BN offering growth. BAM is for older investors seeking income, while BN is for younger, long-term investors.
BAM trades at a 7.1x PE, pays a 3.9% dividend yield with a target payout ratio of 90%. Managers are aiming to double its business in five years, which would approach the historic growth average of 14.6% of its parent company. Price-to-book is 1.4x and price-to-cash flow 4.8x. The street has three buys, one hold and one sell at a price target only 8.7% higher at $48.22. Comparing BAM to BN, BAM has gained nearly 13% since Dec. 12 and BN -1.15%. Read Which Brookfield? for our full analysis.
Which is the better investment depends on your view of real estate. BN owns 75% of BAM, but you're also getting a huge real estate portfolio and that's primarily offices. Great locations, but under pressure with return to work not happening. So, value of real estate holdings has dropped considerably, and that's affected the shares. If you have a constructive view on real estate, you can get BN at a very good price here.
BAM continues to clip the coupon on fee-generating revenue. If you want more of a steady as she goes, pick this one.
Track record of management behind both is exceptional. Longer term, you'll do well.
Over the next year interest rates should reverse, so we should see some good pickup in stocks that are yield plays. Not looking for big gains on these types of stocks.
Chart for BN shows the common pattern of a peak in 2021, and then a decline in 2022. Lots of correlation with the market. Now the stock's bottoming out, and we'll have to see where the next trend is. Decent support around $41, so you're OK if it stays above that. So many other stocks to choose from, he wouldn't touch this one.
BAM has been consolidating. Hard to trade, as the trading range is quite narrow. It's a buy from a yield perspective. If it breaks above $48 and hits a new level, a whole new round of buyers will come in. Holds it for some clients as a way to diversify.
BN owns a percentage of BAM. BN is trading at a discount to NAV, widest discount in a long time, which is why you want to look at buying it here. Working at home has hurt BN's commercial properties. BN has raised lots of capital, great company, well run. BAM and BN are two of the best businesses you can own.
4.54% bonds maturing 2023. You are lending to a holding company but they are hard asset investments, diversified over North and South America and Europe. At a spread of 233 basis points for 10-years there is a decent pickup for the risk.