Want to search for posts across your favourite author? Just click on their name to reach their '100 most recent posts' page, and then use the search box located beside their name.
- Manlobbi
Stocks A to Z / Stocks P / PulteGroup (PHM)
No. of Recommendations: 8
No. of Recommendations: 1
Management says potential for 25% annual returns with BN.
No. of Recommendations: 7
Management says potential for 25% annual returns with BN.Management says Plan Value is $74 per share. Plan Value according to them is the sum of Blended Invested Capital (as opposed to IFRS Invested Capital) and their assessment of the value of Carried Interest. They break it down as shown below.
1. Blended Invested Capital 89 billion
2. Target carried interest, net 25 billion
3. Accumulated unrealized carried interest, net 6 billion
Total 120 billion or 74 per share
1 is a combination of IFRS for unlisted entities and market cap based on actual quotes for listed entites.
2 is (Carry we expect to earn assuming the fund achieves the target return, annualized on a straight-line basis) * (industry multiple of 10 to reflect franchise value)
3 Accumulated carry generated based on fund performance to date, assuming funds are liquidated at current values
==================================================
It goes without saying that Mr. Market doesn't see it this way. Otherwise the price (as of 9/24/23) wouldn't be at a 56% discount to their Plan Value.
Since we can realize returns only in the actual market and not in a slide deck or spreadsheet, it may be better to value BN using Distributable Earnings which seems to be the metric that Mr. Market is using.
I view Distributable Earnings as just a fancy name for Free Cash Flow. Using DE before realizations, current earnings yield is 7.36%. Including realizations which are lumpy but real, bumps earnings yield up to 8.81%. Viewed from this lens, BN is a good value but not absurdly cheap given the current macro economic environment. When trying to understand the market price, I find this perspective more reasonable, than going down the rabbit hole of management untrustworthy, financial statements three-card monte, accounting fraud, Enron, etc. which came up in previous threads, but with no specific evidence.
It's not for nothing that BN hit a all time high in 2021. DE in 2021 was 6,282 million, but plunged 17% to 5,229 in 2022 which explains the 35% price plunge from split adjusted 47.95 at 2021 yearend to post split 31.26 at 2022 yearend.
Assuming no multiple expansion, our total return from this point onwards can be expected to track DE and should result in a high single digit pleasant return as a baseline case. Any DE growth more than that or multiple expansion, if it occurs, is just gravy on top.
No. of Recommendations: 13
Using DE before realizations, current earnings yield is 7.36%. Including realizations which are lumpy but real, bumps earnings yield up to 8.81%. Viewed from this lens, BN is a good value but not absurdly cheap given the current macro economic environment.
Great post. But on this comment above you are perhaps viewing the company somewhat as bond. A bond yielding 8.81% would be considered *very* cheap (the 10-year by compassion is 4.5%). But bond earnings are fixed, whilst Brookfield's distributable earnings are growing (factually grew and set to continue growing) at a rate of more than 15%.
A yield of x% that pays all cash out and also grows the earnings at a rate or y% has an effective yield of (x+y)% for purposes of comparing to a bond with a fixed yield.
But BN doesn't pay (much) cash out so we can't simply add the yield and the growth in this way. It is using the earnings itself for much of its growth.
A sane approach is to look at the comparable opportunities. A typical company at a typical time the last century has a PE of 15 (an earnings yield of 6.7%), and grows earnings at a rate of 2% above inflation each year (the average of the last century), and pays out about 3% in dividends. So growth plus dividends is about 5%, and that is your real total return - provided you buy and sell at the same valuable multiple there is no other value you can extract.
If growth was unchanged but the average multiple of the market was double at 30, then you would get the same growth but the 3% dividend yield would half to 1.5%, so your total return would be less at 4.5%. That is what good investors would prefer a perpetually cheap market (that remains undervalued, and never even recovers to a normal valuation) than a rationally priced market.
Right now the S%P500 dividend yield is 1.5% but that is temporary as the market is near a historically high valuation (the last 150 years it only traded this high about 4% of the time (vs sales, book value or normalized earning).
A company growing more than 2% above inflation reliably usually commands a higher PE than 15 (a lower yield than 6.7%).
In this context a firm growing earnings now than 10% above inflation as BN is achieving on trend, and capable to either continue growing or optionally today slow growth plans but diatribe all present earnings at a yield of around 7%, is *very* cheap.
Many would pay double the price today (resulting in a 3.5% earnings yield, growing over 10% per year) if they didn't know what the firm was and just looked at the likely earnings growth and current yield. This reconciles with managements's discount to Plan Value of about 50%.
Frankly I found the earlier threads about the company possibly having a culture of fraud and comparing to Enron of an insinuating category which is easy (maybe fun) to do but without any both substantial and specific details. BN has lots of moving parts, there are private deals taking place almost daily, but .. they do put out far more documentation about their business than they need to do. ( Every public subsidiary, and the parent, séparately issues the supplementary reports to reconcile / make more sense of the mandate IFRS financials, and a Shareholder letter quarterly and not only annually for all 5 subs, long investor presentations each yield, on top of the necessary filings. )
Management are overpaid throughout all large firms including BN, I of course despise it, but other than Berkshire can you point me to an approx $100B firm that doesn't have overpaid management? This criticism should be aimed at the systemic problem and introducing government limits rather than allowing the markets to voluntarily pay their CEOs less. That latter won't happen, and the trend is towards more greed each decade, not less.
Of course they have an optimistic tone but they are not a 'sit on your ass' (to borrow a phrase from Munger) business as Berkshire and it is their job to attract private investor to partner with new funds - this is our income growth source so we want them to have an optimistic tone. It isn't a 14th European church casting an atmosphere of illness and sin to recruit more loyalty. More importantly if you read their past plans going back 20 years (they often cited goals for 5 years) and the observed what they achieved, you find that their optimism isn't just spin but the goals in the past have been realistic and generally achieved or surpassed.
- Manlobbi
No. of Recommendations: 8
you are perhaps viewing the company somewhat as bond ....
All good points. I was simply trying to come up with a perspective that Mr. Market, let's call him MM from now, is possibly using to arrive at current prices.
MM is perfectly happy with a (0.32 * 4)/34.10 = 3.75% distribution yield for BAM. For BN, however, MM wants a much higher earnings yield in the 7% - 9% range. MM is drawing a clear distinction between cash in hand which BAM gives you every quarter, versus DE which BN will reinvest in pursuit of future earnings growth. Perhaps MM doesn't trust BN to reinvest DE wisely and grow earnings as projected? BN does have a track record of delivering earnings growth as projected, but currently market sentiment clearly does not reflect that.
========================================
DE based valuation:
CFO Nick Goodman addressed DE based valuation in his presentation. He acknowledged that their Plan Value of 120 billion or 74 per share is a 24 multiple to current DE of 5 billion per year. A 24 multiple is not cheap!
On a forward looking basis, he said that the current Plan Value of 120 billion or 74 per share, translates to a DE multiple of 15 only. This is because he is expecting an average annual DE of 8 billion for the next 5 years.
Using current share price, instead of Plan Value, gives a DE multiple of 51 billion/5 = 10 and on a forward looking basis, 51 billion/8 = 6.4 only. Definitely very cheap if they end up achieving their DE target.
========================================
Some other perspectives:
If you look at capital allocation, the relatively low level of share purchases doesn't reflect their assessment that current price is at a 55% discount to plan/intrinsic value. Are the other re-investment opportunities really better than buying dollar bills for 45 cents? I am actually okay with the situation. I would rather they invest into BAM funds, insurance, etc. and grow actual earnings rather then repurchase BN shares based on an imagined lofty Plan Value which the market has never agreed with.
They like to point out that their capital base has grown to approximately 140 billion dollars. However, 5 billion earnings on a 138 billion dollar capital base (120 billion plan value + corporate borrowings + perpetual preferred shares) gives you a ROA of only 3.62%. ROE is slightly higher at 5/120 = 4.16%. Not exactly a high margin business if you buy into their assessment of plan/intrinsic value. Using IFRS book value, however, gives a much more respectable ROE of 5/40 = 12.5%
========================================
Overall, the odds are in our favor at these prices. The price is in the zone of reasonableness/cheapness depending on your perspective. Those looking to start/increase allocation will do well dollar cost averaging into BN at current prices.
I finally got through watching 1.5 days worth of Investor Day videos. Even though my allocation to Berkshire is much higher, I very much prefer the Brookfield format where you get to hear from a large number of people in the management team. At least you learn something new every year, compared to at Berkshire where Charlie and Warren just ramble on about this and that. It's enjoyable and entertaining, but you rarely learn anything new about the business or hear from others on the management team.
No. of Recommendations: 2
Baybrook, very good posts. Aids my understanding of how the market values this "black box" vs standard posts just following the managements metrics. I have a much better understanding now. Appreciated
No. of Recommendations: 1
Manlobbi, no one that I know of has accused Brookfield of fraud. Not even close.
Any chance you, as someone I consider quite upfront and willing to be honest, will go anywhere close to admitting how incredibly far wrong you were about the performance of BPY back in the days you were exclaiming 7 times your money in 10 years- the IV 10 of 7? I do believe I got quite the criticism for suggesting your analysis, all management quotes and presentations, was off by miles and miles.
It simply was off by miles and miles. Nothing more, nothing less. Was it dealrakers fault you and Brookfield were off on your expertise as to both business and stock prices? I don't think so.
Is there any way in the world anyone can actually post realistic stuff on topics in the shrewd forums without being condemned to living hell?
Jesus Christ this is insane.
No. of Recommendations: 1
Do any of you guys conceptualize that on investor day you are listening to some very motivated hard core salespeople who are focused on raising $ for Brookfield to fee? The value people, if it isn't yet clear to you, is in the fee business.
Whether you gain access to that with BN or BAM and choose based on that hopeful access given valuations...it is your decision and it gets complicated.
But as far as this bunch being Warren Buffett investors? Lord help, give it a break.
And think about interest rates. The hard selling presenters say 95% of financing is fixed, in classic Brookfield promotion. I'd look at the financial statements if I were you at some point...along with the good looking obviously bright and super-duper salespeople doing these presentations.
Fees and more fees, the game is perfectly obvious and it ain't investing acumen that's running this show.
No. of Recommendations: 10
Do any of you guys conceptualize that on investor day you are listening to some very motivated hard core salespeople who are focused on raising $ for Brookfield to fee?
Actually my reaction was the exact opposite. I was thinking why are you guys publicly boasting about how you will make billions and billions in fees and carried interest. Is this really the best way to raise funds? Won't this put off prospective fund investors? Won't fund investors find a Vanguard style 'lower fees' pitch more attractive? I think fund raising happens elsewhere. To me investor day comes across as their annual attempt to shore up the share price, but it does seem increasingly desperate each year. Thou doth protest too much comes to mind, especially when they talk about plan value. Exact opposite of Berkshire where they couldn't care less about the share price!
The value people, if it isn't yet clear to you, is in the fee business.
Yes, the BAM spin off has made this very clear. BN market cap is 51 billion out of which 41 billion can be attributed to their interest in BAM.
If you add their share of all the listed entities (BAM, BEP, BIP, BBU) and subtract debt and preferred capital, that also comes to 41 billion, which interestingly is also BN's IFRS book value.
This means that if you buy BN now, for about 10 billion you are getting BPG, Insurance, Direct Investments (most of which are in real estate funds), future carried interest and some operating businesses. This is a 60% haircut to the IFRS values of these entities and ZERO value assigned to carried interest. It is undeniable that the market doesn't agree with BN's assessment of their real estate business and hasn't done so for a long time. Nevertheless, everything has a price and BN is seemingly dirt cheap now. Time will tell.
Fees and more fees, the game is perfectly obvious and it ain't investing acumen that's running this show.
No doubt fees and carried interest is the most valuable part of the business, but how can it be that they don't have investing acumen. Sovereign wealth funds and institutional investors are not fools. It's simply not possible to raise so much money year after year if the funds are not generating attractive returns which in turn is not possible without investing acumen. Being able to invest at scale in real estate, renewables, infrastructure, private equity and now increasingly in private credit and insurance seems like a lot of whole lot of investing acumen to me.
No. of Recommendations: 5
And the subs are in my view not superior, not superior because the parent is constantly slicing out more fees. Investors scream buy the fee business while ignoring where the fees originate. Joe and Bob originated a real estate business and then began a fee business within the real estate business screaming its fees made all of it more valuable. Logic?
Above was posted on the Berkshire board, but replying here for obvious reasons.
It's true that listed affiliates pay BAM a fee, but I don't see anything wrong with this. For example, buying a BBU unit is simply a way for a retail investor to become a limited partner in BAM's private equity funds.
In BAM's private equity funds for example, BAM is the general partner and there are several limited partners in each fund including BBU, institutional investors, sovereign wealth funds, pension funds, etc. Buying a BBU unit simply means you instantaneously become a limited partner in all of the funds that BBU is already invested in.
When BBU says they bought a company, it's really BAM buying it and managing it with money from BBU and other limited partners. So BBU might end up with a 30% interest, with the rest distributed among other LPs.
In return for BAM's asset management efforts, all limited partners in the fund pay a fee, including BBU. Everybody gets a return, net of fees. BBU units are owned by retail investors, BN and individuals in management. Fees from listed entities are only a portion of total BAM fees.
I visualize all Brookfield employees, everybody we saw in the investor day parade, as working for BAM. BN and everybody else in the alphabet soup, whether listed or not, are just financial holding entities which give capital flexibility to management and choice to investors. Somebody please correct me if I am not thinking about this the right way.
No. of Recommendations: 1
Once again, to make it perfectly clear, it is only manlobbi who uses the term Enron in reference to anything Brookfield. And once again to make it absolutely perfectly clear, blisteringly clear, my view is that FFO and DE are overstated for Brookfield entities for various reasons.
To the degree of when we find this out? Higher rates equal sooner; lower rates further out. BAM is the clear winner in all cases but given the hyper complex fee gains they get from literally higher stocks prices even BAM can be troubled as to fee growth.
Life is great...if you can stand it. Opposing views? Not something Baybrooke or Blackswanny want to read, but long ago they actually didn't mind my posts at all.
Group behavior is group behavior.
No. of Recommendations: 6
Opposing views? Not something Baybrooke or Blackswanny want to read
It's not true that board participants do not want opposing views. It's good for investors to not only not block opposing views, but actively seek them out and evaluate against their investment thesis.
As a practical matter, it's not possible to block opposing views. Millions of market participants in the form of Mr. Market offer a view every day and for the past almost 2 years the view has been nothing but opposing. Unless you completely block out prices, which is not possible, there is no escaping the constant barrage of opposing views that have been coming our way this year and last year.
In the spirit of not shunning bearish views, which have clearly won over the last 2 years, I will highlight that BN is down an astounding 46.79% from it's all time high (ATH).
BN hit a spin-off adjusted Nominal ATH of 50.50 on 2/10/22.
Adjusted for inflation, that's a Real ATH of (307.789/283.716) * 50.50 = 54.78.
That makes today's (10/27/23) BN closing price of 29.15 down 46.79% from its Real ATH. Conversely, the real ATH is 88% above current price.
All this carnage and the recession, assuming one is going to occur in this rate hike cycle, hasn't even started yet! On the contrary, Q3 GDP grew by 4.9%!
What if there is a severe recession in 24? How low will BN go? Maybe the Covid bottom of 17.44 on 3/23/20 offers a clue. Adjusting for inflation that is (307.789/257.953)*17.44 = 20.81. So worst case scenario is 28% below current price of 29.15 with SP500 probably around 3000.
For good measure, the pre covid high was 36.87 on 2/21/20 which adjusted for inflation is 43.81 in today's dollars. That's 50% above current price.
In summary, unless something catastrophic happens and BN goes bust, BN will eventually surpass its ATH, which means almost doubling from today's price. However, on the way to this pleasant future result, it may plunge another 28% from current levels!
