General Electric's (GE -0.17%) stock has lost more than 30% of its value in the past year and is down more than 80% from its all-time high. While that sell-off catches the eye of value-focused investors, it's almost impossible to peg the industrial giant's value. Not only is its profitability unclear because of the challenges facing several of its businesses, which make a traditional earnings-based valuation tricky, but the sum of its parts also suggests the company might not worth all that much because of its debt and other liabilities.
Brookfield Asset Management (BN -3.91%), on the other hand, offers value-conscious investors a clearer picture not only of its value today but also of what it could be worth in the future. That's why value investors should forget about GE and instead take a closer look at Brookfield.
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GE remains a mess
GE is in the midst of a massive turnaround effort. The company is working to simultaneously improve the profitability of several of its struggling operating groups, including its troublesome power division, while selling or spinning off more valuable businesses to reduce debt. The industrial giant has a long way to go before investors will have a clear picture of the long-term earnings power of the new GE. Earnings and cash flow will probably therefore remain under pressure in the near term as the company works to address the issues plaguing its power and aviation units. That uncertainty makes it nearly impossible to value the company using earnings-based metrics.
Meanwhile, GE is working on a whole host of transactions to separate several of its major business units to improve its financial profile. The company already combined its oil and gas division with Baker Hughes (BKR -1.13%) and is in the process of merging its transportation unit with Wabtec (WAB -0.23%). After that, it intends on spinning off its healthcare unit. These deals, however, haven't marked complete separations, as GE initially took a 62.5% stake in Baker Hughes and planned to hold 24.9% of Wabtec while spinning off 24.3% to shareholders.
While those stakes are valuable pieces, GE hasn't yet proved that it can maximize that value since it unloaded a 12.5% interest in Baker Hughes last year, right as shares of the oilfield service giant had plummeted because it needed the cash. If the company gets desperate again, it could unload more shares of either Baker Hughes or Wabtec at unattractive prices. That makes it hard to get a sum-of-the-parts value, since the company's focus isn't on maximizing the value of its assets, as it's more concerned with managing its large debt load.
Image source: Getty Images.
Brookfield looks attractive
While there's no doubt that GE's turnaround potential is intriguing, it's a risky situation since the company still has so much work to do before it's back on solid ground. Brookfield Asset Management, on the other hand, offers investors a much clearer picture of value both today and in the future. The company walked through that math at its investor day last fall.
Currently, Brookfield Asset Management, which not only manages private equity funds but also operates in the renewable power, infrastructure, and real estate sectors, has a market value of about $45 billion, or about $44 per share. The company, however, owns more than $30 billion of real assets across those three core sectors and several others, mainly through its interest in renewable power companies Brookfield Renewable Partners and TerraForm Power, private equity business services company Brookfield Business Partners, real estate companies Brookfield Property Partners and Brookfield Property REIT, and infrastructure owner Brookfield Infrastructure Partners. On top of that, it operates a valuable asset management business that the company believes is worth more than $25 billion, given its current earnings potential. That implies a $55 billion, or $56-per-share, value for the company, suggesting it currently sells for a roughly 25% discount to the value of its assets.
Furthermore, given the predictable nature of the businesses Brookfield Asset Management operates, the company believes that the value of the assets it owns will increase to $56 billion over the next five years. Driving that view is the embedded growth within its controlled subsidiaries, since Brookfield Renewable, TerraForm, Brookfield Property, and Brookfield Infrastructure all expect to grow their earnings and dividends by a mid- to high-single-digit annual rate over the next five years as they complete expansion projects and make acquisitions.
On top of that, Brookfield pegs its asset management business as being worth $63 billion in five years, given the projected growth in fee-related earnings and its expected share of the profits from its various private equity funds, which it anticipates harvesting in the future.
Add it up, and this implies a per-share value of Brookfield at about $119 in five years, or a 24% compound annual growth rate. Looking out even further, Brookfield believes that its businesses should generate $60 billion of cumulative free cash flow over the next decade. That's a jaw-dropping amount of money for a company currently valued at $45 billion.
Go where there's a clear value proposition
There's a temptation to see value in GE's beaten-down stock. While it might be there, it's hard to pin down because of the lack of clarity in its earnings potential, as well as its assets. Brookfield, on the other hand, offers investors a much clearer picture of value not only today but also in the future. That's because the company trades at a significant discount to the value of its assets, which should be worth even more in the future, given the predictable growth embedded in each entity. That's why value investors should forget about GE for now and instead take a closer look at Brookfield Asset Management.
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