If all you knew about two companies was that one seems to be doing everything right and the other seems to be doing everything wrong, which would you pick? The outperformer, hoping its strong performance continues? Or the underperformer, hoping it'll turn itself around?
Well, let's start the new year with a "BA-BAM!" by comparing troubled airplane manufacturer Boeing (BA -2.44%) and well-run asset management company Brookfield Asset Management (BN -2.00%) to see which one looks like the better buy right now.
Boeing's name is synonymous with flight, but Brookfield's stock has been soaring. Image source: Getty Images.
Diversification
Brookfield Asset Management is a very diversified company, while Boeing isn't. Boeing is laser-focused on manufacturing aircraft -- mostly airplanes for commercial airlines, but also some military jets in the mix. Brookfield, on the other hand, manages a sprawling portfolio of specialty assets through the master limited partnerships it controls, including Brookfield Infrastructure Partners and Brookfield Renewable Partners. These subsidiaries give Brookfield exposure to industries including telecommunications, transportation, energy, real estate, and debt in locations across the globe.
A well-diversified company, though, isn't necessarily a superior investment. If not enough of your portfolio's assets are outperforming -- or if too many are underperforming -- all that diversity may come back to bite you. However, if you have too many eggs in one basket and that one basket underperforms, that's bad as well.
Even though the commercial aviation industry is doing very well right now, and even Boeing's military business is doing well, Boeing had a lot of proverbial eggs in its troubled 737 MAX basket. The planes have been grounded since March 2019, and there are no signs that's about to change.
Considering that this one model not only made up the bulk of Boeing's sales but also of its backlog, the company's failure to fix the plane's underlying issues -- along with plenty of management missteps along the way -- have set the company on its heels, to the point that the stock only gained 1% in all of 2019, compared to the S&P's 28.9% gain and Brookfield's 50.7% gain. Score one for diversification.
Winner: Brookfield Asset Management
Valuation
We expect to pay a premium price for an outperforming, well-run stock. However, it's also possible to pay too much. While there's no hard and fast rule about how much is too much, a look at common valuation metrics like the price-to-earnings ratio, enterprise value-to-EBITDA ratio, and price-to-free cash flow ratio can help.
Usually, when a stock price appreciates quickly, these valuation metrics also rise. And since a lower valuation is more attractive, it may not make sense to buy into a stock that's been on an outperformance streak.
However, what's surprising here is that it's actually Boeing whose valuations have skyrocketed. That's thanks to its declines in earnings and cash flow as the 737 MAX saga has dragged on. Boeing is still manufacturing the planes, but it can't deliver them -- and thus, can't get paid for them -- so it's been just parking them onsite. There are even reports of old employee parking lots being used as impromptu tarmacs, because the company has simply run out of room.
As you can see in the chart below, Brookfield's valuation metrics have actually gone down even as the share price has gone up over the past three years:
BA PE Ratio data by YCharts
Winner: Brookfield Asset Management
The expectations game
It may seem like this is a rout in favor of Brookfield Asset Management. However, we also need to consider how quickly and how well Boeing might be able to get out of its current predicament. CEO Dennis Muilenberg, who was at the helm for most of this debacle, resigned in late December. He'll officially be replaced by Board Chair David Calhoun on January 13. That said, there are still valid concerns about management's transparency or lack thereof.
Operationally, if Boeing can just get regulators to greenlight its software and design fixes for the 737 MAX, its current problems may not disappear overnight, but will resolve themselves fairly quickly: The company will be able to deliver a glut of 737 MAX aircraft (and get paid for them). That should almost immediately push Boeing's valuation back down and its share price upwards. Even though it will likely have to shoulder additional expenses to compensate customers for the delays and ready the grounded planes for service, Boeing will still have a wide competitive moat in a lucrative industry.
Of course, there's no telling when that will happen. Meanwhile, the well-managed Brookfield is already rewarding its investors.
Winner: Brookfield Asset Management
The plane truth
Even though Brookfield's shares handily outpaced both Boeing's and the S&P's last year, and even though it's likely that Boeing will -- sooner or later -- recover and see its shares rise in response, the strength of Brookfield's management and its diversified portfolio combine to make it the better buy right now.
