Brookfield Business Partners’ SWOT analysis: stock undervalued amid growth potential

Brookfield Business Partners (NYSE:BBU) L.P. (NYSE:BBU; TSX:BBU.UN), a diversified global business services and industrials company with a market capitalization of $5.28 billion, has been attracting attention from analysts due to its strong performance and strategic initiatives. Despite macroeconomic uncertainties, the company’s focus on high-quality businesses and effective capital allocation strategies has positioned it for potential long-term success. According to InvestingPro, BBU is a prominent player in the Industrial Conglomerates industry, with annual revenues reaching $35.35 billion.

Company Overview

Brookfield Business Partners specializes in acquiring and operating businesses that benefit from barriers to entry and low production costs. The company’s portfolio spans various sectors, including industrial products and business services. BBU’s investment strategy centers on identifying undervalued assets with potential for operational improvements and growth.

Recent Performance

In the fourth quarter of 2024, BBU reported impressive results, with EBITDA reaching $653 million, representing a 7% year-over-year increase and surpassing analyst expectations. This strong performance continued into the first quarter of 2025, with EBITDA of $591 million, aligning with market projections. The company’s trailing twelve-month EBITDA stands at $7.16 billion, demonstrating its significant operational scale. InvestingPro data shows the company has maintained dividend payments for 10 consecutive years, with a current dividend yield of 1.01%.

Analysts anticipate BBU’s solid performance to persist, with estimated EBITDA for the second quarter of 2025 at $595 million. For the full year 2025, analysts project EBITDA of $2,480 million and Earnings from Operations (EFO) per unit of $5.37.

Portfolio Companies

BBU’s larger portfolio companies have been key contributors to its recent success. Clarios, a global leader in advanced energy storage solutions, and Sagen, a prominent mortgage insurer, have demonstrated strong performance and growth potential. Other notable holdings, such as Scientific Games (NASDAQ:LNW) and CDK, are also showing positive momentum with ongoing profit improvement initiatives.

Capital Allocation Strategy

A cornerstone of BBU’s strategy is its active approach to capital recycling and strategic acquisitions. The company has executed approximately $1.5 billion in capital recycling year-to-date through May 2025, including sales and dividends from portfolio companies. This approach has enabled BBU to reduce corporate borrowings by over $1 billion in the first quarter of 2025 alone, significantly improving its financial position.

BBU has also been actively participating in new acquisitions, such as Antylia Scientific and Barclay’s payments business, leveraging its stronger balance sheet to pursue growth opportunities. The company’s opportunistic unit and share buyback program further demonstrates its commitment to enhancing shareholder value.

Financial Health

The company’s focus on debt reduction has materially decreased its financial leverage. Analysts expect further improvements in BBU’s financial position as it continues to monetize assets and recycle capital. This strengthened balance sheet, reflected in a healthy current ratio of 1.48 and an Altman Z-Score of 5.0 according to InvestingPro, not only reduces financial risk but also provides BBU with increased flexibility for future investments and potential returns to unitholders. The company’s strong free cash flow yield of 26% further underscores its financial strength.

Market Valuation

Despite BBU’s strong performance and strategic initiatives, analysts believe the company’s true value remains underappreciated by the market. The price-to-net asset value (P/NAV) ratio stands at approximately 0.5x, significantly below historical average levels. According to InvestingPro’s Fair Value analysis, BBU appears to be fairly valued at current levels, with analysts setting price targets ranging from $22 to $34. This valuation assessment, combined with InvestingPro Tips indicating management’s aggressive share buybacks and expected net income growth, presents an interesting opportunity for investors to evaluate.

Bear Case

How might macroeconomic uncertainties impact BBU’s performance?

While BBU has demonstrated resilience, macroeconomic headwinds could potentially affect investor sentiment and the performance of its portfolio companies. Economic slowdowns or volatility in key markets might lead to reduced consumer spending, impacting revenues across BBU’s diverse business segments. Additionally, rising interest rates could increase borrowing costs, potentially affecting BBU’s ability to finance new acquisitions or refinance existing debt on favorable terms.

What risks does BBU face from potential tariffs on its portfolio companies?

Some of BBU’s portfolio companies, such as DexKo, may be exposed to tariff-related risks. Changes in international trade policies or the imposition of new tariffs could increase costs for these businesses, potentially squeezing profit margins. While BBU management considers these risks manageable, prolonged trade disputes or escalating tariffs could have a more significant impact on the overall portfolio performance.

Bull Case

How could BBU’s capital recycling strategy drive future growth?

BBU’s active capital recycling approach has proven effective in unlocking value and creating new investment opportunities. By strategically divesting mature or non-core assets, the company can redeploy capital into higher-growth opportunities or undervalued businesses with significant potential for operational improvements. This strategy not only optimizes the portfolio but also allows BBU to maintain a strong balance sheet, providing flexibility for future acquisitions and investments in emerging market trends.

What potential does BBU’s undervalued portfolio offer for investors?

Analysts argue that BBU’s current market valuation does not fully reflect the intrinsic value of its portfolio companies. With a P/NAV ratio of approximately 0.5x, there is significant potential for price appreciation as the market recognizes the true value of BBU’s assets. As portfolio companies continue to improve their operational performance and BBU executes its value creation strategies, investors could benefit from both NAV growth and multiple expansion. The company’s share buyback program further supports this potential upside by reducing the number of outstanding shares.

SWOT Analysis

Strengths:

• Strong capital recycling capabilities
• Diverse portfolio of high-quality businesses
• Effective capital allocation strategy
• Proven track record of operational improvements

Weaknesses:

• Exposure to macroeconomic uncertainties
• Potential impact of tariffs on some portfolio companies
• Complex corporate structure may be challenging for some investors to understand

Opportunities:

• Undervalued portfolio with significant return potential
• Potential for increased return of capital to unitholders
• Ability (OTC:ABILF) to capitalize on market dislocations for attractive acquisitions

Threats:

• Macroeconomic headwinds affecting investor sentiment
• Competitive landscape in private equity and business services sectors
• Regulatory changes impacting portfolio companies or acquisition strategies

Analysts Targets

• BMO Capital Markets (May 5th, 2025): Outperform, $34.00
• RBC Capital Markets (May 5th, 2025): Outperform, $30.00
• BMO Capital Markets (February 3rd, 2025): Outperform, $34.00
• RBC Capital Markets (November 11th, 2024): Outperform, $32.00

This analysis is based on information available up to May 24, 2025, and reflects the views and projections of analysts at that time. For a deeper understanding of BBU’s investment potential, explore the comprehensive Pro Research Report available on InvestingPro, which includes additional financial metrics, expert analysis, and 6 more exclusive ProTips that could influence your investment decision.

InvestingPro: Smarter Decisions, Better Returns

Gain an edge in your investment decisions with InvestingPro’s in-depth analysis and exclusive insights on BBU. Our Pro platform offers fair value estimates, performance predictions, and risk assessments, along with additional tips and expert analysis. Explore BBU’s full potential at InvestingPro.

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