Brookfield Asset Management 2Q2018 Update

Brookfield Asset Management (BAM) 2Q2018 results were on trend as expected.
Total AUM was $287B, Fee Bearing Capital increased 12% to $129B, Fee Related Earnings increased 34% to $1.1B and Annual run rate of Fees plus Target Carry increased 23% to $2.6B.

In the last few months BAM have advanced or completed a number of large transactions – including the acquisition of the balance of GGP for $15 billion, a large mid-stream natural gas gathering system in western Canada for $3.3 billion, the closing of the acquisition of Westinghouse Electric Company for a total purchase price of $4 billion, the commitment to acquire Forest City Realty Trust and Enercare for $6.8 billion and $2.5 billion, respectively, and the acquisition of a number of solar and wind facilities in Spain for $1.2 billion.

Brookfield is in the market to raise the next Real Estate Fund and Private Equity Fund and plans to start raising the next Infrastructure Fund from 4Q2018.

We believe BAM shares are worth $50 today with $22 attributed to Asset Management Franchise and $28 attributed to Balance Sheet Assets. It is likely that growth over next 4-5 years will lead to $80+ with Asset Management Franchise worth $40 and Balance Sheet Assets worth $40.

Brookfield 2Q2018 Results

BRK Changes BuyBack Policy to Remove 1.2 Times Book Value Restriction

Since 2012, Berkshire (BRK.A) has restricted buybacks to prices below 120 percent of the stock's book value, which is an estimate of the company's value after liabilities are subtracted from assets.
Given the company's massive cash pile of $120B+ , the rule change Remove 1.2 Times Book Value Restriction for share buybacks. It will not do so if it reduces its cash below $20 billion.

BRK has not done a good job deploying capital over last 3 years. A share buyback at $125 to $145 range over last 2-3 years would have been a good use of excess capital in the absence of any meaningful acquisitions.

GOOGL 2Q2018 Results Analysis - Revenue UP 26% Year Over Year

GOOGL Revenues up 26% Year Over Year to $26B (32.5B revenue - TAC 6.5B) and excluding currency gains organic growth in revenue was 23%. GOOGL expected revenue for 2018 will be > 100B. The current valuation is in range of $850B. So it is trading at 8 times revenue. 

Profit will depend on operating margin which has been shrinking steadily over the years. GOOGL also has excess net cash balance of $120B+ which is $150+/share. 

Excluding the fines EPS for the quarter would be $11.75. So on an annualized basis GOOGL is currently earning $50 EPS. So excluding cash ($150 per share) GOOGL can be considered as trading at 22 times Forward earnings [($1200-$150)/50]. 

If GOOGL can continue to grow top line at 24% per year over next 4 years to 2022 then revue will double and earnings will double if margins remain comparable. So an investor today at $1200 needs to hope for this to happen to start making 10% business  return per year 4-5 years from today and hope the business is sustainable in the long run. 

The economics on the shares purchase a year ago at $950 per share are 6.25% earnings yield currently if we exclude the $150/share cash and divide EPS $50 by share price $800. 

https://abc.xyz/investor/pdf/2018Q2_alphabet_earnings_release.pdf

Brookfield Renewable now owns 30% of TERP

Brookfield Renewable (BEP) increased its total commitment to $420 million and now its interest in TerraForm Power (TERP) is 30%.


With change to tax subsidy rules in US there are fewer players in Solar and Wind Energy development. This will allow TERP to emerge as a major player in US in this attractive market and allow the company to deleverage with cost reductions, organic growth and synergies when merged with Saeta Yield.

GOOGL and FB are Best Large Cap Tech Growth Stocks at Reasonable Value

GOOGL and FB are Best Large Cap Tech Growth Stocks at Reasonable Value as of 1Q2018 end. Excluding Cash both GOOGL at $1050 and FB at $160 trade at 20 times Forward Earnings assuming GOOGL earnings growth of 20%+ and FB earnings growth of 25%+.

Both Alphabet (GOOGL) and Facebook (FB) continue to invest in future growth drivers including Artificial Intelligence, Cloud Services etc.

Brookfield Continues to Execute on 2022 Plan

Brookfield (BAM) Continues to Execute on 2022 Plan as evidenced by 1Q2018 results.

As of 1Q2018 Fee Paying AUM increased to $127B, ENI for LTM increased to $2.1B, Annualized Fee Base and Target Carry increased to $2.5B and Cash Flow for LTM increased to $2.5B with $1B of Fee Related Earnings and $1.5B of Investment Income (from BPY/BIP/BEP/BBU and other Listed and Un-Listed Investments).

Mritik Capital expects Fee Related Earnings to grow 15% to 20% per year through 2022 and Investment Income to 10% per year through 2022 (aided by organic growth and new investments). This would imply Fee Related Earnings close to $2B and Investment Income of $2.5B which would imply $4.5 Cash EPS by 2022 end. We project BAM fair value to increase to $75+ by 2022 end.

Key value drivers over next few years would be GGP deal closing for BPY, Organic Growth and TerraFirm related growth for BEP, Organic Growth, NTS recapitalization and Major New Acquisitions for BIP, GrafTech and North American Palladiun Exits and Westinghouse turnaround for BBU and continuing strength in the Brookfield Homes business.

Berkshire Hathaway 1Q2018 Results Analysis

Berkshire Hathaway (BRK.B) 1Q2018 Results Analysis indicate that the company is moving along slow and steady with existing operating companies continuing to generate cash. With the exception of Insurance Businesses all other operations are doing well and generating earnings growth.

Not withstanding the $12B invested in APPL in the latest quarter BRK.B inability to invest the $112B cash has been a major disappointment and a drag on the growth of the book value and earnings power. Warren Buffets performance as the Chief Capital Allocator over the last 24 months has been a huge disappointment.

Mritik Capital rates BRK.B a HOLD with a price target of $250 for 2018 year end.