In Q2, Bill Ackman’s Pershing Square added 156,000 new shares to its holdings of Brookfield Corporation (NYSE:BN).
Brookfield itself is an investment business that manages a large portfolio of renewable energy, real estate and private equity investments, to name just a few of its many holdings.
Why did Bill Ackman buy BN stock, and could Brookfield be worth a look at today’s prices?
Ackman’s Buying History in Brookfield
It’s worth noting that Bill Ackman’s Q2 purchase continued a larger trend of buying activity in BN shares. Ackman has been gradually stockpiling shares of Brookfield since Q2 of last year, when he bought about 6.9 million shares at an average price of $41.78. Interestingly, Ackman has added to Pershing Square’s BN position in every quarter since then, gradually building it up to account for about 13 percent of the fund’s portfolio. Today, BN is the second-largest holding in the Pershing Square portfolio, behind only Uber Technologies.
What Ackman Himself Has Said About Brookfield
Bill Ackman has personally described the types of assets Brookfield owns as “the backbone of the global economy,” acknowledging the importance of the renewable energy infrastructure and AI data centers contained in the Brookfield portfolio.
Indeed, this statement seems to have only become more true since Ackman started buying BN shares last year. The data center boom has only sped up this year, and with it has come a massive increase in energy demand. By 2030, AI power demand could increase to 50 GW, putting significant strains on existing power generation.
This growing need for power has sent the stocks of many renewable energy businesses and innovative energy startups substantially higher in recent months. Unlike most of these startups, however, Brookfield already owns a massive portfolio of renewable energy assets.
With wind, solar and hydroelectric generation all included in its renewable mix, Brookfield has a diversified blend of renewable energy sources. On the other side of the data center equation, Brookfield has also invested heavily in its own data center acquisitions.
Measuring Brookfield Against Ackman’s Investment Standards
Over the years, Bill Ackman has been quite transparent about what he looks for when selecting stocks. These basic characteristics have been distilled down into Ackman’s so-called eight commandments for selecting investments.
Put simply, Ackman tends to focus on businesses that are simple and predictable, generate free cash flow, occupy competitively advantageous positions and face limited risks from macroeconomic downturns. Ackman also prioritizes strong management that is sharply focused on creating shareholder value.
Using some of the criteria Ackman has outlined, it quickly becomes apparent why he is so bullish on Brookfield.
While calling Brookfield’s assets simple may be inaccurate, the business owns infrastructure and energy assets that are reliably in demand and which generate a fairly predictable stream of income. Ackman has also noted the business’s ability to generate additional income in the form of fees on its managed assets.
The nature of Brookfield’s assets also limits its exposure to macro risks. While investment returns will almost certainly fluctuate, the data centers and energy infrastructure that Brookfield owns are, as Ackman himself noted, fundamental economic assets that will be valuable in any macro climate. This, paired with Brookfield’s large presence in industries that have high cost-related barriers to entry, gives the business a durable moat that is unlikely to weaken in the near future.
Another positive point where Ackman’s criteria are concerned is the fact that Pershing Square has a longstanding relationship with Brookfield’s management. The two businesses worked together when Pershing Square restructured General Growth Properties well over a decade ago, a turnaround that resulted in a $1.6 billion return for Pershing.
A final element of Brookfield that may have appealed to Ackman is its responsible use of debt. While Brookfield certainly isn’t debt-free, its debts have an average term of 14 years, giving it considerable flexibility as long as its over obligations remain reasonable. As a result, Brookfield has limited need for external capital, though it does also have considerable access to undrawn credit lines.
Is Brookfield’s Performance Proving Ackman Right?
Turning to Brookfield’s recent performance, it would seem that Ackman’s instincts for selecting high-quality businesses are paying off once again. In the fiscal year to date, Brookfield has monetized about $55 billion worth of assets.
This monetization contributed to consolidated net income of $1.06 billion in Q2. Brookfield also has a record $177 billion of capital it can deploy toward new investments, setting the stage for further returns going forward.
In addition to bolstering its financial position, Brookfield achieved several operational successes in the last reported quarter. These included a 3,000-megawatt contract with Google for hydroelectric energy in the US and the acquisition of Just Group, a pension risk transfer business from the UK. Fee-related earnings from Brookfield’s asset management business also rose 16 percent to $676 million as fee-bearing capital increased 10 percent to $563 billion.
Is Brookfield a Buy Now?
Although Brookfield shares have climbed by over 20 percent in the past year alone, BN could still represent a compelling value argument. The current price of $44.82 is still about 15.5 percent below the analyst consensus price target of $49.70.
Although net income has been modest recently, Brookfield still has a massive amount of capital that can be deployed toward new investments and an impressive portfolio of assets already under its umbrella. As such, a temporary dip in net income may not have a particularly deep impact on the long-term value of the business.
The fact that Pershing Square has kept buying shares in each successive quarter could further bolster the case for remaining value in BN. Though Q2’s purchases were lighter than in past quarters, Ackman and his team still appear to be deeply bullish on Brookfield as a long-term holding.
Overall, Brookfield could be worth looking at as a buy in today’s market. With a diversified portfolio, a seemingly reasonable valuation and exposure to some of the most vital economic assets of the modern world, there’s a great deal to like about Brookfield’s business. Future deployment of capital could build further value in the already attractive business, gradually supporting higher share prices.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.