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Brookfield Asset Management: A Great Business, But Timing is Key

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In my last article about Brookfield Asset Management (NYSE:BAM), I emphasized the need for caution. Since the article was published in June 2023, the stock has lost more than 10% in value. However, my concerns extend beyond a 10%, 15%, or even 20% loss. I believe the market is headed for a significant crash in the coming months and quarters, as evidenced by the significant declines of major banks such as JPMorgan Chase (JPM) and U.S. Bancorp (USB) by as much as 50%.

Nevertheless, Brookfield Asset Management remains an intriguing story and a potentially great investment. This article will present a balanced perspective, highlighting both positive and negative aspects of the company in the current market environment.

Great And Undervalued Investment

When examining the reports and presentations, it becomes evident that Brookfield Asset Management is a great business with consistent and impressive growth. Various valuation metrics also suggest that the stock is undervalued.

Still Growing

In the first six months of fiscal 2023, Brookfield Asset Management generated $2,039 million in total revenue, a 21.4% increase compared to the same period last year. Although the net income declined 4.5% year-over-year, the companyโ€™s growth remains impressive.

Looking at the last twelve months, Brookfield Asset Management achieved 14.7% year-over-year growth in fee revenues, with distributable earnings per share increasing by 9.0%. These numbers demonstrate the companyโ€™s consistent performance.

Still Raising Capital

Brookfield Asset Management has been successful in growing its assets under management and fee-bearing capital. In the last twelve months, fee-bearing capital increased by 12% year-over-year, driven by significant fundraising efforts. The companyโ€™s ability to raise cash, including $12 billion for a global private equity fund, showcases its robust capital-raising capabilities.

Furthermore, Brookfield Asset Management currently holds $83 billion in โ€œdry powder,โ€ which provides liquidity and the ability to deploy capital into attractive opportunities when the time is right.

Still Optimistic

Management remains optimistic about the companyโ€™s future prospects. During the 2023 Investor Day, management reaffirmed their targets, highlighting their previous track record of surpassing expectations. The companyโ€™s ability to beat its own optimistic targets in the past instills confidence in its ability to do so in the future.

Over the next five years, Brookfield Asset Management expects its fee-bearing capital to grow with a CAGR of 18% and exceed $1 trillion by 2028.

Risky And Challenging Environment

While Brookfield Asset Management continues to perform well, and management remains optimistic, there are reasons for caution. Similar companies, including regional banks and asset managers, have experienced underperformance in recent times, reflecting investorsโ€™ cautious sentiment.

Furthermore, Brookfield Asset Managementโ€™s stock has recently experienced a steep decline of approximately 20%. Although stock performance does not necessarily reflect fundamental performance, it indicates investor sentiment and the perception of risks in the market.

Rising delinquencies, bankruptcies, and the possibility of a stock market decline all pose risks to alternative asset managers like Brookfield Asset Management. While the company is not directly impacted by declining stock prices, a market environment characterized by fear and panic can affect alternative asset managers, leading to lower inflows or even outflows of cash.

Additionally, Brookfield Asset Managementโ€™s exposure to real estate and credit markets presents additional challenges. These sectors are typically sensitive to economic conditions, making the company susceptible to the state of the economy and potential recessions.

Valuation

Unlike many banks and asset managers, the valuation of Brookfield Asset Management relies heavily on its growth prospects. Currently, the stock trades at about 22 times earnings, making it relatively more expensive compared to other financial institutions.

A discounted cash flow calculation suggests that Brookfield Asset Management needs to grow between 5% and 6% from the present to perpetuity to be fairly valued. A significant departure from these growth rates could affect the stockโ€™s valuation.

Bottom Line

Considering the factors discussed, I would cautiously recommend Brookfield Asset Management as a โ€œBuyโ€ or a โ€œHoldโ€ for interested investors. While I believe the stock will yield positive returns in the long run, prospective buyers should be prepared for potential price drops in the coming quarters or years.

While I do not anticipate disappointing earnings reports in the immediate future, given the solid results from other financial institutions, future quarters may yield lower earnings. The stockโ€™s performance during a market sell-off remains uncertain, but given its current valuation, it cannot be deemed overvalued.

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