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Where Will Brookfield Asset Management Stock Be in 3 Years?

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Brookfield Asset Management (TSX:BAM) is a very popular stock among value investors. It is owned by value investors like Mohnish Pabrai and has legendary bond/value investor Howard Marks on the team. This is a company very popular with some very smart people, so it’s worth paying attention to.

However, Brookfield having a lot of smart shareholders doesn’t automatically make it a buy. Even the smartest people sometimes make mistakes. Brookfield’s Bruce Flatt actually moved some of his money from BAM to Brookfield, its parent company. So, going by insider activity, Brookfield Asset Management may not be the best piece of the Brookfield empire to own today.

Growth trends look good

One thing that Brookfield Asset Management has going for it right now is growth. In its most recent quarter, it delivered

  • $791 million in revenue, up 17.9%;
  • $59 million in investment income, up from -$1 million; and
  • $516 million in net income attributable to shareholders, up 48%.

It was a pretty strong quarter. But then again, that’s not surprising. BAM has a great business model. As it is asset light, it does not incur much in costs apart from paying employees. Brookfield Asset Management has some of the highest profit margins you’ll find anywhere. For example, it has a 79% gross margin, a 71% operating profit margin, and a 53% net margin. Even the big U.S. tech companies aren’t this profitable — and they are well known for large profits.

Asset management is a great business, particularly from the perspective of profitability but also growth to an extent. So, Brookfield Asset Management is thriving.

Issues in real estate

One issue that Brookfield Asset Management shareholders will want to think about is the real estate sector. BAM’s parent company Brookfield recently defaulted on real estate related debt. This issue may affect BAM itself; media coverage of the issue simply says that “Brookfield funds defaulted“; it doesn’t say which ones.

Brookfield Asset Management runs some real estate funds, so it could be one of them. The first-quarter earnings press release doesn’t mention any defaults, but that doesn’t necessarily mean that Brookfield isn’t part of the funds that are defaulting. It looks like Brookfield is playing the “default” matter pretty close to its chest, so investors will want to keep an eye on credit-related issues going forward.

For more on potential risks to Brookfield investors, check out this Motley Fool exclusive video: Can Brookfield Stock Fail?

Brookfield Asset Management: The Foolish takeaway

Brookfield Asset Management is one of the most profitable companies in Canada. Going by margins, it’s probably one of the most profitable companies in the world. Over half of BAM’s revenue turns into profit: that’s an incredible level of profitability. At the same time, there are issues within the Brookfield empire as well. Some of the Brookfield companies/funds are defaulting on their debts. In researching this article, I was not able to determine specifically which ones, but it’s possible that BAM is being affected by the defaults. There are reasons to be cautious here.

Nevertheless, I would say that BAM is, on the whole, a pretty good stock. It’s profitable, it’s relatively cheap, and it’s growing. What more could an investor ask for?

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