BINFF - Brookfield Infrastructure Partners: The Conglomerate Advantage

2023-04-19 08:47:26 ET

Summary

• Brookfield is taking on everyone, even when we're just talking about infrastructure.
• Brookfield Infrastructure Partners is a massive, diversified infrastructure conglomerate with their hands in nearly everything.
• I look to see if being a conglomerate truly has advantages by comparing BIP vs. all of its competitors.

Overview

Most investors' first thoughts when seeing Brookfield vs. everybody are likely about the fact that Brookfield as a parent corporation operates in a multitude of different industries. Just to name a few, there are publicly listed Brookfield entities for asset management ( BAM ), infrastructure ( BIP ), renewable energy ( BEP ), and insurance ( BNRE ) among others.

Even more impressive, if we look at just the infrastructure corporation of Brookfield we see that it is highly diversified within itself. Over the years, Brookfield Infrastructure Partners L.P. ( BIP ) has built up a massive portfolio of infrastructure assets, creating a behemoth that is among one of the largest infrastructure companies in the world. In total, Brookfield Infrastructure owns roughly $45 billion in physical assets.

After seeing all of the different types of infrastructure that BIP owns a stake in, I became curious about how advantageous conglomerates really are. Luckily, there are plenty of public companies that operate as competitors to each of their sectors. The best way to tell if there are advantages to having all of your assets under one roof versus standalone companies is to do a direct comparison between the average performance of standalone competitors and BIP as a whole.

Competitor Companies

To match up each division of Brookfield Infrastructure Partners with a peer in the market, I had to create somewhat of an extensive list. The breakdown of comparison companies is as follows.

• Digital Realty Trust ( DLR ) as a peer in the data center asset space.
• American Tower Corp. ( AMT ) as a comparison to the large portfolio of cell towers that BIP owns.
• AT&T ( T ) for as a matchup to the extensive fiber optic cable network under the BIP umbrella.
• Enbridge ( ENB ) will serve as a head-to-head comparison for BIP's midstream pipeline assets.
• Canadian National Railway ( CNI ), a direct competitor in the Canadian railroad market.
• American Electric Power ( AEP ) to reflect the vast electrical connection network owned and operated by BIP.

Personally, when I take a quick glance at each of these competitor companies, I see some strong performers and reliable companies that have been staples in countless investor portfolios over the decades. In fact, most of the listed companies could be considered best of breed for their area of business.

BIP vs. Everybody

To paint a clear picture on how a large multi-faceted company compares to standalone competitors, I will compare several important metrics for each of these companies and take the average of all of the competitors and compare to BIP on its own as a conglomerate. The ratios and values that I have chosen to compare them reflect what most long-term and dividend investors would value when evaluating a stock. Using Seeking Alpha's comparison tool, here is what we find.

I can genuinely say that I was a bit shocked to see the results. While I knew BIP was a healthy company with strong performance, I did not expect to see it best its peers in every single metric. Total returns were not only greater than the peer average returns, but they were actually over three times greater! This is noted by the significant outperformance by Brookfield in EBITDA and operating income growth. Not only do you get the total returns performance but you also get a higher yield AND faster dividend growth. If you had invested $100,000 into BIP versus an even spread of the competitor companies into a "Competitor ETF" three years ago, you would be sitting in a significantly better position.

To sweeten the pot even more, your already significantly larger pile of dividends will continue to accelerate in delta away from the Competitor ETF if the historical dividend growth rate were to be maintained.

Looking Forward

When continuing to research BIP, I found additional reasons to be impressed. Even though they are already an extremely large company, they are continuing to identify new business ventures and unlock further value. Something that I am pretty excited about is the Intel Foundry partnership . I see this partnership as a genuinely genius move by BIP management for several reasons.

At a high level, BIP will split the $30 billion cost to build a new semiconductor fabrication facility in Arizona. Intel will retain 51% and operating control of the facility while BIP retains 49%, but that is more than okay, mainly due to the fact that semiconductor fabrication is Intel's core business and is best to be operated by them. Meanwhile, Brookfield has pulled off some outstanding financial engineering . The $15 billion investment from BIP will be funded largely by retained cash flows and capital recycling of current investments, along with a portion funded by non-recourse debt, taking on minimal liabilities to uphold their portion of the deal. On top of that, Brookfield will actually be earning between an estimated 4% and 8.5% rate of return due to the undisclosed financing terms between both companies. Estimated equity for BIP at completion is between $500-$750 million. Better yet, semiconductor fabs are great producers of cash that Brookfield will maintain 49% of moving forward. All in all, BIP will realize positive cash flows during its construction and even stronger cash flows once it's completed. Not to mention the equity in an extremely valuable domestic manufacturing facility. This will have a compounding effect for Brookfield Infrastructure as well because increased chip production and an acceleration in digital infrastructure needs will benefit their data center and telecom businesses along with several others.

Management's ability to utilize cash flows and special forms of financing has worked wonders on the balance sheet. In today's high-rate environment, this debt profile is truly an achievement.

Takeaways and Risks

This exercise was eye-opening for me personally. I have long seen many dividend investors here on Seeking Alpha swoon over the Brookfield companies, and for some reason, I seemed to always gloss over these magnificent entities. Maybe the complicated corporate structure deterred me, or maybe it was the fact that they are Canadian companies and historically operated as tax-burdensome L.P.s. I suppose it was likely one of those reasons, but it appears that was a big mistake.

This comparison helped me truly understand the potential for outsized returns that conglomerates can offer shareholders. What is even more encouraging is that it appears EBITDA margins have room for expansion as the higher-margin telecom and data center segments continue to expand within BIP. It's hard to deny the attraction to investing in this well-oiled machine and watch the money pile up.

However, it can't all be sunshine and roses. There is one major pillar that BIP's success leans on, and that is management execution. While they built themselves quite a track record, it will only become more difficult in the future as the empire grows and outsized gains become harder to obtain. It is also important to note that all of these physical assets are at the mercy of mother nature, and I think it's reasonable to say that it feels like extreme weather events are becoming more and more frequent as we scramble to wrangle the global warming crisis.

Summary

In full honesty, I did not expect the results we saw from this analysis. I actually own several of the competitor companies I used in the comparison and hold them with high conviction, but now, I have been forced to rethink my stance. One thing is for certain, BIP is now number 1 on my watch list and I will look to begin a position hopefully in the near future. For those of you not familiar with my monthly article series or my portfolio , I am a fan of infrastructure and engineering stocks, so I am looking forward to adding a new company to my portfolio.

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