Brookfield Business Partners

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 3/5

Brookfield Business Partners is a global business services and industrials conglomerate focused on owning and operating high-quality businesses in infrastructure and other sectors.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Brookfield Business Partners (BBUC), is a diversified group of business in business services, infrastructure and industrials sectors, listed on NYSE and TSX exchanges. BBUC acquires and operates businesses. Their key strategy is to acquire underperforming companies, improve their operations, and then sell them at a profit.

Business Overview

Revenue Distribution

  • Business Services: This segment includes facilities management, security services, and healthcare services.
  • Infrastructure Services: This includes businesses such as energy infrastructure, logistics, and ports.
  • Industrials: This segment encompasses manufacturing, distribution, and industrial technology.

The company’s revenue is distributed across multiple geographies, including North America, Europe, and Asia-Pacific.

  • BBUC is a highly diversified company with operations spanning many sectors.

Industry Trends

  • Infrastructure: Infrastructure is a highly capital-intensive industry, characterized by long-lived assets, limited competition due to high barriers of entry, and regulated prices. Stable and predictable cash flows make these assets attractive for long-term investments, even though the growth isn’t always high.
  • Business Services: This industry has a fragmented landscape, with varying levels of competition depending on sub-sectors. Services which can get integrated more deeply into client operations generally provide pricing power and customer lock-in which creates a more durable source of profits.
  • Industrials: This is generally a cyclical commodity business with some specialization based on customer needs. Differentiated product segments can command pricing power, while commodity products are subject to price competition. This industry is susceptible to global supply chain disruptions and high costs related to inputs.

Margins

  • The company’s gross margins have been around 20-30% for the last three years, however profitability has varied due to write-offs and restructuring costs. This indicates that even though the business is generating large revenues, there can be some problems in converting those revenues into profits.

Competitive Landscape

  • Brookfield Business Partners operate in highly competitive markets, and often faces competitors that are larger and more established. In business services, they often compete against companies that are local, and therefore may have better relationships. In infrastructure and industrials, they often face companies that have a lower cost advantage.

What Makes BBUC Different?

  • Brookfield Business Partners positions itself as an alternative owner that can provide hands-on operational expertise to underperforming businesses and transform their operations by acquiring, improving, and exiting these businesses at a profit.

Financials In-Depth

BBUC’s financials are complex because of their diverse holdings and capital structures. So, it is important to look at the big picture.

  • The company has a complex capital structure, consisting of a variety of securities, including common equity, preference equity, debt, and hybrid instruments. For debt, it uses various lending instruments, including revolving loans, mortgages, and senior notes.
  • In 2022 and 2023, the company has sold equity at premium to market value, a tactic which gives them excess capital.

Revenue & Operating Profit: The company’s revenue has been quite volatile over the last three years. For 2023, the company showed an increase in revenue from $6.995B to $7.663B, with net income rising from $(1.076)B to $2.850B. The income increase was driven by revenue growth along with lower interest rates and decreased asset impairments. However, the operating margins are weak at 4.8%, and it shows they are not very profitable.

  • Free Cash Flow (FCF): FCF for 2023 was $729M, a huge jump compared to the -$1150M figure from 2022. This is a very important indicator that the operations are improving. However, we don’t know if the growth can be sustained.

  • Net Profit/Net Loss: The company’s net profit has fluctuated a lot. In 2021, they had a net loss of $1300M, in 2022 they had a profit of $1076, and in 2023 they had a profit of $2850. This fluctuation is primarily due to the nature of acquisitions and restructuring of companies that are often acquired at a low price and sold at a profit, creating large gains and losses.

Overall, recent results are improving, and the company’s income and free cash flow are improving. Also, the company was able to pay down some of the debt, which is a positive.

Moat Analysis: 2 / 5

Moat Rating Justification

BBUC does not really have a sustainable economic moat. Their business is based on acquiring, improving, and selling a lot of businesses, and the competition is quite high in all the sectors in which the company has operations. The only area where a company like BBUC could have a moat is if they are the best at acquiring and turning around businesses and nobody else can do it better than them; however, that is not the case as private equity is a huge industry with many players with considerable expertise.

BBUC’s moat depends primarily on operational expertise, which doesn’t make for a great and sustainable moat due to the variability in quality of management and implementation of practices.

They have some advantages in some specific fields:

  • Scale-Based Advantages in Some Areas: BBUC has large distribution networks, like in the business services space. This is not a huge competitive advantage as other players can build similar operations.
  • Intangible Assets in Some Cases: When they purchase businesses with strong brands, they inherit those intangible assets. A lot of the businesses they own don’t have a very strong brand or intellectual property and are more commodity in nature.
  • High switching cost in some parts In some business service segments, BBUC is tightly integrated with their customers and therefore these services have high switching costs. It is still not a major competitive advantage.
  • Cost Advantages in Some Businesses: Some of their businesses have a location advantage, like their infrastructure assets, but these are not exclusive to them.

Given the above information, BBUC’s moat isn’t very strong, and I’ll give them a moat rating of 2 / 5.

Legitimate Risks That Could Harm the Moat and Business Resilience

  • Acquisition Risk: There is always a risk that a company like BBUC could make a bad acquisition. If they end up buying a low-quality business with low profitability and a bad market share, that will put the company’s profits at a risk.
  • Implementation Risk: There is always a risk that BBUC is not able to improve the operations of an acquired business, and therefore they are not able to resell it at a profit, thus resulting in losses.
  • Competitive Pressure: The industries BBUC operates in are quite competitive and there is high rivalry from competitors. These competitors may be able to outcompete BBUC by providing lower prices, better services or better products.
  • Macroeconomic Conditions: Since BBUC operates in global markets, they are exposed to different macroeconomic environments and therefore there are a number of things that can go wrong, including financial crises, recessions, high interest rates, trade wars, and other such events that can have a significant negative impact on their profitability and operations.
  • Debt and Leverage: The company has a significant amount of debt and if the interest rates rise, then their profits would be heavily impacted.
  • Lack of Long-Term Relationships With Customers: Since BBUC is primarily in the business of buying, improving, and selling, they don’t have a lot of long-term customer relationships. Therefore, they are always looking for new opportunities which exposes them to risk.
  • Management: Ultimately, their long-term success depends on the management ability to choose the right businesses and implement the right strategies. Bad choices, strategies, and management issues can have a significant impact on their future profits.
  • Integration Risk: Many of their acquisitions involve international operations. The integration of these into their existing operations can be complex and cause problems with revenues and profits.
  • Technological disruption: In some sectors they are operating in, it is possible that new, disruptive technologies might come and disrupt the current business, including competitors.
  • Regulatory Changes: The government regulations are different in every country and BBUC operates across multiple geographies, this can lead to increased operating costs and decreased margins.

Business Understandability: 4 / 5

The business model of acquiring and operating various businesses is quite simple to understand. However, when we dig down to the individual businesses that BBUC operates, their operations are complex and require specialized knowledge. Also, the nature of the business includes a lot of acquisition and divestiture activity, which makes the company complex. Overall, I would rate the business understandability as 4 / 5.

Balance Sheet Health: 3 / 5

  • Debt Levels: The company carries a high debt, with long-term debt at $12.1B, which can be risky if interest rates rise in the future.
  • Cash Position: The company currently has cash of $1.13B, which is good but not great, and not enough to weather major economic events.
  • Liquidity Ratios: Their current assets to current liabilities ratio is 1.6, which is good, showing their capability of meeting short term liabilities.

Despite the positive improvements in the financials, BBUC’s balance sheet still has some weaknesses such as high debt levels. Therefore, I would rate it as 3 / 5.

Recent Concerns/Controversies and Management’s Outlook

  • The company was asked about the recent decrease in earnings, they said that the recent economic pressures are temporary and they expect to resume growth.
  • They said that the focus will be on organic growth rather than acquisitions, to consolidate operations and improve profits.
  • They are trying to pay down the debt while maintaining flexibility to invest in opportunities when they see it.
  • They are trying to focus on high-quality investments to create shareholder value.
  • They said that the economic environment continues to be favorable for the assets that they own and have been experiencing strong demand for their products and services.