Bill Ackman of Pershing Square Capital has made a number of changes to his company’s portfolio over the last year.
One of the largest has been the acquisition of a sizeable stake in Brookfield (NYSE:BN). Pershing Square began acquiring shares of BN in Q2 of last year, but by Q4 Ackman had bought up 34.9 million shares accounting for nearly one-fifth of the total Pershing Square portfolio.
Why did Bill Ackman go into Brookfield in such a major way, and could the stock still hold upside for investors looking at it today?
What Exactly Is Brookfield’s Business?
Brookfield specializes in alternative investments, including things like real estate, infrastructure and private equity investments.
It currently has a portfolio consisting of over 2,000 investments in more than 30 countries while, on the client side, Brookfield offers access to its portfolio to both institutional and individual investors.
The company’s clients include both sovereign wealth funds and pension funds.
Ackman’s Bullish Reasoning on Brookfield
As usual, Bill Ackman hasn’t left much necessary guesswork on his decision to invest in Brookfield. The decision was closely tied to the types of assets Brookfield owns, which Ackman himself has described as the “backbone of the global economy.”
With its combination of data centers, energy infrastructure and logistics infrastructure investments, Brookfield nicely fits Ackman’s preference for simple, predictable businesses that fare well under almost any economic conditions.
Brookfield also appears to have been selected for its ability to scale up. As the company increases assets under management, it can generate more income from the fees it charges to its investors.
Assuming Brookfield performs well, as Ackman obviously expects it to, the investor base has the potential to expand quickly and generate significant fee growth over time.
Ackman’s investment strategy also relies heavily on choosing businesses with strong competitive moats. While Brookfield is far from being the largest investment company in the world, it does have a fairly healthy competitive position in the world of alternative investments.
With more than $1 trillion in assets under management and a debt-free balance sheet, the company enjoys a combination of scale and limited financial risk that likely appealed to Pershing Square.
Ackman has also publicly stated his opinion that BN trades at a significant discount to its intrinsic value. This discount is quite evident when one compares the company’s net assets as of the end of 2024 to its present market cap. As of December’s reporting, BN’s net assets totaled $165.4 billion.
The market cap, by contrast, is just $79.3 billion. This sizeable discount to the value of the company’s assets is the sort of thing that often catches Ackman’s eye.
Brookfield’s Profitability
Ackman is also known to prioritize a company’s ability to generate returns on capital when making his investment decisions.
Here, Brookfield doesn’t quite line up with his usual investment criteria. Brookfield’s ROIC over the last 12 months has been almost negligible, and its net margin is sitting at under 1 percent. The company does, however, have an appealing operating margin of 25.8%.
Pershing Square has also gone into its Brookfield position at a time when the company’s cash flows are much less attractive than usual. Free cash flow turned negative in 2023 and 2024, but prior to that the company had a history of strong free cash flows going back to 2013.
BN’s Dividend Is Decent Though Not Stellar
A final factor that may have attracted Ackman to BN is the stock’s combination of a fairly safe dividend dividend and room for additional growth. While Ackman doesn’t exclusively target dividend-paying stocks, it’s worth noting that several of his major positions over the years have been in companies known for their dividends.
Brookfield’s dividends are somewhat low, with its trailing 12-month yield standing at about 0.6%. Given the fact that it is likely to broaden its fee-based investment management business, though, this dividend may well grow at quite a healthy pace in the coming years.
In the meantime, its distributions could also add a bit of extra cash income to the Pershing Square portfolio.
Why Did Bill Ackman Buy Brookfield Stock?
Brookfield is trading at a steep discount to fair value of $63 per share and has a wide moat with the potential for fees to drastically increase over time as it houses AI datacenters.
Looking at all the pieces of the puzzle together, Brookfield looks like a fairly natural buy for Ackman. The company’s business is both predictable and fairly insulated from external economic risks. Its balance sheet is quite strong, a fact that may make up for a temporary period of lower free cash flow.
Over time, Brookfield has significant room for additional growth that could allow both its share prices and its dividend distributions to drift steadily upward.
All of these characteristics make Brookfield the kind of company Ackman is known to favor. What likely caused him to stake out such a large position, though, was the undervaluation of Brookfield’s shares. With the stock trading far below Ackman’s expectations of its long-term intrinsic value, BN became a natural addition to the Pershing Square portfolio.
To some degree, Ackman has already been proven right where Brookfield is concerned. Pershing Square’s average cost basis on BN shares is $46.80, and the stock has already climbed to over $53 in the year since Ackman started buying. While this return is very respectable over such a short period, the fact that Pershing Square kept adding to its position in Q3 and even Q4 last year suggests that Ackman still sees considerably more upside left in the stock.
Here, Ackman is in agreement with the analysts who are covering Brookfield at the moment. The average target price for the shares is currently $63.50. If BN hits this price over the next 12 months, investors who pay today’s prices would see a return of about 20 percent.
Thanks to the lower cost basis it locked in last year, Pershing Square’s shares would be up by more than 35 percent at that price. So, while Ackman has already seen Brookfield move closer to its fair value since he first bought the shares, there’s a good chance that there’s still enough upside left to make BN worth looking at today.
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.