Investment Thesis

I’m convinced that Brookfield Asset Management (NYSE:BAM) stock is a solid investment choice. The strategic separation of Brookfield Asset Management from Brookfield Corporation highlights its steadfast commitment to a fee-driven revenue model, fortified by enduring investments ensuring regular returns. This pivotal decision, when viewed alongside BAM’s proactive ventures into the rapidly growing realms of renewable energy and infrastructure, showcases the firm’s readiness to tap into global shifts and offer returns that are both stable and forward-looking. Bruce Flatt’s exemplary leadership has been the cornerstone of BAM’s evolution. Guided by his vision, BAM has broadened its horizons and set a bold target of surpassing 15% in annual returns for its shareholders. This ambition finds support in forecasts rooted in a modest growth estimate, pointing to an enticing five-year price projection for BAM at $78.46. If these forecasts come to fruition, we’re looking at a commendable compound annual growth rate of 18.5%, highlighting BAM’s promising future and the strategic prowess of its top brass. All these elements make BAM an enticing prospect for investors.

Company Overview

Brookfield Asset Management stands out as a leading global entity in the realm of alternative asset management. With its roots spread across the globe, the firm has carved a niche for itself, particularly in managing alternative assets. Their expertise is not limited to a single domain; instead, they have a diversified approach that encompasses several sectors. Their primary emphasis lies in real estate, where they have significant holdings and management projects. Beyond that, they have made substantial inroads into infrastructure, ensuring that they are part of the backbone that supports economies. Their commitment to a sustainable future is evident in their investments in renewable power, including wind, solar, and hydroelectric projects. The company operates in 30 countries and is among the world’s largest and most rapidly expanding alternative asset managers, marked by a legacy spanning over a century of owning and operating real assets and businesses that deliver vital services. Recently, BAM has undergone significant changes in its structure and operations. In late 2022, the company finalized the distribution and listing of a 25% stake in Brookfield Corporation’s asset management division through Brookfield Asset Management Ltd. This move granted investors direct entry to the asset management sector on an exclusive basis for the first time, and with the vast majority of their distributable profits stemming from consistent and foreseeable fee-related earnings, coupled with ambitious five-year growth objectives and a lean balance sheet devoid of principal investments and debt, the restructured company has been able to operate a lot more flexibly.

A Business Model Built on Robust Reoccurring Revenues

As I mentioned above, the company has recently separated from Brookfield Corporation (BN). I believe this unlocks a significance for shareholders as, when BAM and BN were intertwined, it presented a complex landscape and business structure which made the company more difficult to understand. Now that the two companies are separate, the robust nature of BAM’s business model can be seen. Brookfield Asset Management’s fee-based structure allows for an impressive recurring revenue stream which is a testament to its robust business model and strategic foresight. Management has outlined that BAM has designed its revenue model to be highly resilient. A significant portion of their revenue is derived from fee-related earnings, which are stable and resemble an annuity-like structure. This makes their cash flow generation profile not only stable but also predictable, which is a desirable trait for investors looking for consistent returns.

An aspect which I find particularly notable is that most of BAM’s $440 billion of fee-bearing capital is invested in long-term private funds that either have a perpetual nature or span over a decade. This long-term investment horizon ensures that the revenue generated from these funds is recurring and not subject to short-term market fluctuations. Such a structure provides a steady stream of income, which is crucial for the company’s financial health, its ability to reward shareholders and its ability to create robust investment strategies for the company’s future.

The fact that much of their revenues are reoccurring enhances investor confidence, as investors typically favor companies with stable and predictable revenue streams. The knowledge that a significant portion of BAM’s capital is tied up in long-term investments should boost investor confidence, as it signals the company’s commitment to long-term value creation over short-term gains which I believe should contribute to the company’s ability to compound earnings into the future. Furthermore, BAM’s asset-light balance sheet is exceptionally strong, with no debt and cash and financial assets of over $3 billion. This financial position further solidifies the company’s ability to generate consistent and recurring revenue. The company’s commitment to returning a significant portion of the cash generated from this business to its shareholders, either through dividends or stock buybacks when appropriate, further emphasizes the strength and reliability of its recurring revenue model.

Strategically Investing into Sectors of the Future

Brookfield Asset Management stands as a testament to strategic foresight in the realm of global investments. With a diversified portfolio of $850 billion assets under management (AUM) that spans renewable power, infrastructure, real estate, and credit, which are some of the sectors at the forefront of the world’s evolving socio-economic dynamics.

We have seen in the past few years that the urgency of climate change and the global commitment to a sustainable future has continued to increase which has propelled renewable energy to the forefront of investment opportunities. Continue to reiterate their unwavering commitment to this sector. They have made substantial investments in renewable energy assets, emphasizing their belief in the sector’s long-term growth potential. As nations pledge to reduce carbon footprints and transition to green energy, the demand for renewable energy solutions is skyrocketing. Annual clean energy investment is expected to rise by 24% between 2021 and 2023 according to IEA, driven by renewables and electric vehicles, compared with a 15% rise in fossil fuel investment over the same period with global investment in clean energy projected to rise to $1.7 trillion in 2023. BAM, with its significant stake of $52 billion in this sector, is strategically positioned to harness this growth. Their investments are not just timely but also indicative of a vision that recognizes the future of energy.

BAM’s investment strategy into Infrastructure also reflects the company’s strategic positioning into an emerging sector. As countries globally emphasize infrastructure development and modernization, the demand for infrastructure investments is bound to surge, reaching $9 trillion in global spending by 2025. BAM, with its clear direction in combination with market-leading expertise and assets in this domain, is well-equipped to cater to this rising demand, ensuring consistent returns and contributing to global development. BAM’s infrastructure portfolio is diverse, spanning utilities, transport assets and digital infrastructure assets, which impressively, are characterized by their ability to generate stable cash flows. Such assets, by their very nature, often operate in monopolistic or oligopolistic environments, have long useful lives, and provide essential services, making their cash flows resilient to economic downturns.

Additionally, the company remains a market leader in established sectors which has long track records of growth and stability providing an excellent backbone to support the company’s other strategic investments into the exciting emerging sectors of renewables energy and digital infrastructure. BAM continues to own prime real estate assets that promise long-term value. And with the world witnessing rapid urbanization and the evolving nature of workspaces post-pandemic, the dynamics of the property market are changing. BAM’s real estate strategy, which emphasizes long-term value and prime assets, aligns perfectly with these changing dynamics, ensuring that they remain at the forefront of real estate investments.

Experienced Management with Shareholders Interest at Heart

Brookfield Asset Management’s senior management team is a testament to the company’s commitment to excellence and deep industry knowledge. The company is led by Bruce Flatt who has been at the helm of Brookfield Asset Management since 2002 and has played a pivotal role in guiding the company’s strategic direction. His leadership has been instrumental in the company’s growth and expansion into various sectors, including real estate, infrastructure, and renewable energy. Bruce Flatt, the CEO, currently owns about 3.96% of the total share outstanding of the company which reflects a significant portion of his reported net worth. His value style investment philosophy has a strong influence on BAMs investment strategy which often leads to the company buying assets when valuations are particularly attractive. The company is dedicated to returning value to shareholders with BAM stating its objective is to deliver compound annual returns of 15%+ to shareholders over the long term. This commitment by management is backed by its excellent history of generating greater than $30 billion of cash flow, since Flatt took over, that was reinvested back into the business.

Financial Analysis

Obviously, BAM is a relatively new company, only being listed on the New York Stock Exchange (NYSE) in late 2022. That being said, we are able to see that, over the past few years, Brookfield Asset Management BAM has showcased robust financial performance. Its revenue growth has been impressive, escalating from a $1.656 billion in 2019 to $3.06 billion in the last 12 months (LTM), translating to a compound annual growth rate (CAGR) of approximate 16.59%. The earnings per share (EPS) for BAM is also impressive, being approximately $4.77 LTM, although this is roughly flat compared to last year. The company anticipates an acceleration in capital raising during the latter half of the year. BAM project that by the end of 2023, they will have achieved an unprecedented level of nearly $150 billion in total inflows. This significant influx is forecasted to substantially boost the company’s fee-related and distributable earnings for 2024. This projection is contingent upon upcoming macroeconomic trends that will determine the industry’s trajectory. Additionally, the management’s consistent ability to execute and various other determinants will play a crucial role.

As of the latest quarter, BAM declared cash and cash equivalents of $2.918 billion. The firm’s total debt is $195 million. As I mentioned before, the surplus of cash and relatively low debt provides BAM with flexibility and presents an exciting opportunity for management to deploy this capital to continue to grow the business at an impressive rate or return the capital directly to shareholders. BAM’s current ratio, an indicator of its capacity to address short-term obligations with immediate assets, stands at 2.33, an impressive number. BAM’s leadership has historically been judicious, prioritizing debt repayment, which can be seen as the company paid all its remaining debt before completing the company separation.

In the short term, I project BAM’s forthcoming quarterly earnings results will show continued progress towards their 2027 goal of $9.3 billion in distributable earnings (DE).

Peering beyond the next year and assuming the company is able continue to execute on their strategy on investing into high quality businesses within preeminent sectors of the stock market, and that macroeconomic dynamics remain relatively stable, I believe BAM is poised for vigorous growth. I am confident in BAM’s potential to fulfill their 2027 DE objectives, especially given their excellent track record of consistently outperformance of their peers and the market as a whole.

Valuation

Brookfield Asset Management have provided a detailed valuation projection for the company, forecasting out to 2027. This is a great guide as it provides an interesting insight into what the management team believe the company can achieve by 2027. Looking at their projection, the company anticipates a CAGR of 28% of the next five years which should result in $12.6 billion in DE by 2027, corresponding to an EPS of approximately $7.70. Obviously, a 28% CAGR sounds exciting to any investor, however, I have decided to go for more a conservative projection to allow for additional margin of safety in my valuation.

For my valuation, I have opted to utilise an EPS of $3.08 (which is the EPS for the last 3 quarters plus $0.31, as LTM EPS is unavailable). BAM’s 2023 LTM EPS was 3.08. Based off the company’s strategic investments and skilled management team, I believe that Brookfield Asset Management should grow conservatively at 18% annually for the next five years. Therefore, once factoring in the growth rate, in 5 years BAM’s EPS is expected to be $7.05. If we then apply an exit multiple of 10, which is approximately in line with what other asset management companies P/E ratio typically traded at for the previous 10 years, this infers a price target in five years of $78.46. Therefore, based on these estimations, if you were to buy BAM at today’s share price of $33.31, this would result in a CAGR of approximately 18.5% over the next five years.

Risks

Investing in Brookfield Asset Management is not without its challenges, much like any other investment avenue. A significant portion of BAM’s portfolio is dedicated to real estate, infrastructure, renewable energy, and other alternative assets. This heavy exposure means that the company’s financial health is intrinsically linked to the well-being of these sectors. Economic downturns can lead to reduced demand in real estate, infrastructure projects might face delays, and renewable energy initiatives could see reduced investments. Regulatory shifts, especially in sectors like infrastructure and renewable energy, can introduce unforeseen challenges or even halt projects. When looking to the past financial downturns, such as the global financial crisis (GFC), Property values plummeted, and there was a sharp decline in demand. Many ongoing projects were halted, and new developments were shelved due to a combination of reduced demand, tighter lending standards, and a general atmosphere of economic uncertainty. Infrastructure spending also faced significant headwinds during the GFC. Governments and private entities, grappling with reduced revenues and tighter budgets, curtailed infrastructure investments. This is evidently a risk for BAM, which suffered quite substantially when apart of BN during the GFC. Should we enter some kind of economic recession as many of their investments would see a decline resulting in a reduction in fee-related earnings.

Access to capital is the lifeblood for sectors like real estate, infrastructure, and renewable energy. These sectors are capital-intensive, requiring significant outlays for projects that might take years to yield returns. BAM’s ability to access capital efficiently can significantly influence its growth trajectory in these sectors. However, high interest rates can act as a double-edged sword. While they can increase the cost of borrowing, making some projects less viable, they can also lead to higher returns on certain investments. But, in an environment where interest rates are high, securing affordable capital becomes challenging. This can slow down project initiation, reduce the scope of ongoing projects, or even lead to the shelving of potential investments.

Furthermore, BAM’s global footprint, while offering diversification benefits, also introduces additional layers of complexity and risk. Investments in foreign countries come with the added challenges of currency volatility. A sudden depreciation in a foreign currency can erode BAM’s returns from that region. Different countries have their unique regulatory landscapes, and BAM needs to navigate these varying terrains, ensuring compliance and mitigating risks. Political instability, especially in emerging markets, can jeopardize BAM’s assets and operations in those regions.

Conclusion

Brookfield Asset Management’s decision to separate from Brookfield Corporation underscores its robust, fee-based revenue model, anchored by long-term investments that promise consistent returns. This strategic move, combined with BAM’s forward-thinking investments in the burgeoning sectors of renewables and infrastructure, positions the company to harness global trends and deliver stable, future-centric returns. The visionary leadership of Bruce Flatt has been pivotal in this trajectory. Under his guidance, BAM has not only expanded its reach but also committed to an ambitious goal of delivering annual returns exceeding 15% to its shareholders. This commitment is further validated by projections based on a conservative growth rate, suggesting a promising five-year price target for BAM at $78.46. Such projections, if realized, would result in an impressive compound annual growth rate of 18.5%, underscoring the company’s potential and the strategic acumen of its leadership.