Despite a recent decline of 15% in share valuation, Brookfield Business Partners (NYSE:BBU) presents a compelling investment opportunity. This downturn has created a significant discount, indicating a potential valuation upside for the conglomerate. This could be an intriguing prospect for value investors seeking to diversify their portfolio with a solid holding.
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About Brookfield Business Partners
Brookfield Business Partners is a listed vehicle for the private equity group Brookfield. Specializing in business services and industrial operations management, the firm invests in, owns, and operates a diverse range of businesses worldwide. Some notable investments include companies like Westinghouse, Clarios, Sagen, and CDK Global.
BBU’s strategy focuses on acquiring high-quality businesses. It leverages its global investing and operational expertise to enhance profitability and generate sustainable margins and cash flows. The investment objective is to achieve robust long-term returns in the range of 15% to 20%.
The company has recently demonstrated its prowess in capital recycling initiatives, generating about $300 million through operations-related distributions and sales of two smaller businesses. Since BBU went public, the company has monetized 20 firms, yielding approximately $6 billion in proceeds, a testament to its strategic acumen and ability to create value.
Brookfield’s Recent Financial Results
In the first quarter of 2024, Brookfield Business Partners outperformed analysts’ earnings per share expectations, reporting $0.23 per share, exceeding forecasts of -$1.55. However, the company experienced a shortfall in revenue, with its $12.06 billion falling nearly 25% below the projected $15.99 billion.
For the first quarter, net income attributable to unitholders was $48 million or $0.23 per limited partnership unit, down from the previous period’s $74 million or $0.34 per limited partnership unit. Adjusted EBITDA declined to $544 million from the prior period’s $622 million, partly due to the sale of the nuclear technology services operation in November 2023.
The company concluded the quarter with roughly $1.6 billion in corporate liquidity, $137 million in cash and liquid securities, $25 million in preferred equity commitment from Brookfield Corporation, and $1.4 billion available in corporate credit facilities. The quarter ended with a successful repricing of a $1.3 billion term loan with BrandSafway, reducing the interest rate spread by 100 basis points, resulting in annual savings of $13 million. This strong demand allowed for an additional $150 million in offering.
Lastly, the Board of Directors has declared a $0.0625 per unit quarterly distribution payable on June 28, 2024.
What Is the Price Target for BBU?
Analysts following BBU have been primarily bullish on its outlook despite its recent performance. For instance, RBC Capital analyst Geoffrey Kwan lowered the price target from $32.00 to $31.00 while maintaining an Outperform rating, noting that Q1/24 results were below forecast but included incremental positives and should continue generating growth in their portfolio.
Brookfield Business Partners is rated a Strong Buy based on the ratings and price targets issued by four analysts over the past three months. The average price target for BBU shares is $30.50, representing an upside of 68.69% from current levels.
Shares have been trending downward since early February this year, shedding -11.5%. Shares trade in the middle of their 52-week price range of $12.22-$23.75 and continue to show negative price momentum, trading below the 20-day (18.90) and 50-day (19.50) moving averages. However, the stock’s downward slide has pushed the shares into relative value territory, with a P/E of 2.8x, well below the Industrial Conglomerates industry average of 14.98x.
BBU in Summary
Despite a recent slide in share valuation, Brookfield Business Partners (BBU) remains an attractive prospect for value investors due to its potential for substantial valuation upside. Although Q1 2024 saw a shortfall in revenue and a decrease in net income, the company continues to generate impressive returns and has demonstrated success in capital recycling. The current discount on the shares presents an investment opportunity with upside potential for those seeking robust long-term value.
