We recently compiled a list of the 8 Best Conglomerate Stocks to Buy Now. In this article, we are going to take a look at where Brookfield Business Partners L.P. (NYSE:BBU) stands against the other conglomerate stocks.
What are conglomerate stocks? These stocks are the ones that have their ownerships in diverse businesses, spanning different sectors like finance, energy, technology, healthcare, etc. To be precise, a conglomerate is a business model where many companies are collected into a single large corporation that is owned by the parent company.
A conglomerate can consist of many businesses in the same industry or from different industries to diversify business and navigate risks. Some conglomerates tend to own a series of companies that make up the entire labor and supply chain for a single end product.
In a conglomerate, a parent company has the controlling stakes of all the smaller and unrelated businesses that operate independently. At times, conglomeration gets enacted by holding companies specializing in M&As. These companies are formed specifically to acquire smaller companies and collect business interests.
Investing in Conglomerate Stocks
There are several benefits of investing in conglomerates, some of which include diversification into several sectors, stability in revenues, synergistic opportunities, and many more. Conglomerates tend to provide greater stability and resilience at the time of market fluctuations as compared to pure-play companies.
Conglomerates have internal capital markets. This means that if one business of the conglomerate performs poorly, its loss can be offset by the other businesses performing relatively better. These businesses benefit by establishing synergies as the costs of operating a series of businesses can be reduced via consolidation. Conglomerates are capable of moving significant sums of money from businesses having limited opportunities for incremental investment to other areas possessing greater potential. These businesses have the potential to scale far larger in size as compared to the businesses constrained by the limited potential of that particular industry in which they are present.
Therefore, venturing into different industries can result in synergistic benefits, which can lead to significant cost savings along with improved cost efficiency. When a series of businesses in a conglomerate combine their resources, the conglomerate CEO can negotiate better deals with suppliers and manage procurement costs. This will ultimately lead to the optimization of production processes. Conglomerates can leverage a diverse portfolio of businesses, leading to cross-selling and cross-promotion opportunities. Through the promotion of complementary products, conglomerates can drive revenue growth.
2024 has been quite volatile for the broader market as a result of sticky inflation, high interest rates, and recession fears. Investing in conglomerates might help investors steer through these uncertain times. S&P 500 Industrial Conglomerates Sub-Industry Index saw a return of over ~35% over the past year, while the broader index (Dow Jones Industrial Average) went up by ~12%.
While investing in conglomerates has benefited investors most of the time, some may find these investments challenging. There can be a loss of efficiency, including a divergence from the core businesses. Moreover, the resources that get divided over numerous businesses might not be synergistic. There can be a lack of transparency in conglomerates, impacting their brand name and market share.
For investors, it is of utmost importance to know the company’s true picture. Only then will an investor be able to generate strong and stable returns. Conglomerate CEOs can sometimes resort to dubious accounting methods to show inflated EPS numbers. Warren Buffett exposed this trend in a letter and explained how conglomerate CEOs, in the late 1960s, used to drive their conglomerate’s stock to 20 times earnings only to issue shares at a higher price and then deploy the proceeds to buy out other cheaper companies. At some point, a conglomerate becomes a collection of poor underlying businesses, with little or no growth prospects.
Later on, through the application of different accounting methods, they show increased per-share earnings. This process ultimately led to the redistribution of wealth, rather than the creation of wealth.
Wealth creation comes from investing in stable and sound businesses, having efficient accounting practices, and strong management. Therefore, investors should be wary of bad management and financial shenanigans while investing in conglomerate businesses.
That being said, if the conglomerate form is used effectively and transparently, it can act as an ideal structure for creating generational wealth.
Our Methodology:
We screened for conglomerate stocks on the Finviz stock screener. We compiled an initial list of 15 large conglomerates by market cap and checked their average price targets. We then selected and ranked the 8 stocks that analysts saw the most upside to, as of 6th August 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A busy construction site with workers hard at work, illustrating the industrials division.
Brookfield Business Partners L.P. (NYSE:BBU)
Average Upside Potential: 68.73%
Brookfield Business Partners L.P. (NYSE:BBU) is a business services and industrial company. The company is focused on operating businesses that are either low-cost producers or benefit from high barriers to entry. It has interests in La Trobe (Australian residential mortgage lender), Multiplex Global Limited (construction operation), CDK Global (dealer software and technology services operation), etc. These come under its business services segment. The infrastructure services segment caters to the interests in Scientific Games Lottery (lottery services operation), Modulaire (modular building leasing services), etc. Finally, the Industrials segment includes interests in Clarios Global LP (advanced energy storage operation), Hammerstone Infrastructure Materials Ltd (aggregate production operation), etc.
The company released its financial results for the quarter ended March 31, 2024. During the period, the company outperformed analysts’ EPS expectations. It posted EPS of $0.23 per share, crushing forecasts of -$1.55. However, Brookfield Business Partners L.P. (NYSE:BBU) experienced a shortfall in revenue, with the figure coming at $12.06 billion. This exhibits a shortfall of ~25% as compared to the expected figure of $15.99 billion.
The company saw strong margins, and this progress is contributing to improved quality of earnings of its operations. Access to capital continues to be favorable and the company generated ~$300 million of net proceeds as a result of capital recycling initiatives. These initiatives included agreements to sell 2 small operations.
Analysts following the company are primarily bullish on the company’s outlook. For instance, analysts at RBC Capital believe that 1Q 2024 results consisted of incremental positives and should generate growth in portfolio.
Bill Gates mentioned that he has decided to invest billions of dollars in next-gen nuclear power plant project in Wyoming to address increasing US electricity needs. Because of his ownership of Westinghouse Electric Company, Brookfield Business Partners L.P. (NYSE:BBU) controls one of the largest nuclear energy providers in the country. Brookfield Business Partners L.P. (NYSE:BBU) manages and directs infrastructure of these facilities.
Therefore, the company is directly responsible for offering fuel to reactors, maintenance, components and engineering service to 2/3rd of world’s nuclear power plants. It probably has widest base of any publicly traded US nuclear company to build from as and when this industry expands.
According to Insider Monkey’s first-quarter database, 2 hedge funds held long positions in Brookfield Business Partners L.P. (NYSE:BBU), up from 1 in the previous quarter.
Overall BBU ranks 6th on our list of the best conglomerate stocks to buy. You can visit 8 Best Conglomerate Stocks to Buy Now to see the other conglomerate stocks that are on hedge funds’ radar. While we acknowledge the potential of BBU as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than BBU but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
