Brookfield Business Partners (BBU), known for its savvy investments and impressive turnaround tactics, dropped a bombshell during their Q1 2024 earnings call, and it seems the financial world has been too busy crunching numbers to notice. While everyone focused on the "Fabulous 5", the juggernaut companies driving BBU's impressive cash flow, a subtle yet profound shift in strategy was unveiled: Brookfield is embracing artificial intelligence (AI) not just as a trendy buzzword, but as a core value-creation engine.

While many corporations are just dipping their toes into the AI pool, BBU has already established an "AI Value Creation Office" a dedicated team with a mandate to unlock the transformative power of machine learning across its diverse portfolio. This isn't just about automating emails or creating chatbots. BBU is applying AI to its core operations, from risk assessment in its residential mortgage insurance business to supercharging customer service with AI-powered virtual assistants at its dealer software operation.

What's particularly striking is the depth of BBU's AI integration. They're not simply buying off-the-shelf solutions; they're actively building proprietary AI models. Take their residential mortgage insurer, for instance. They're leveraging decades of proprietary housing data to develop predictive models that can refine underwriting criteria and proactively manage risk. This suggests a long-term commitment to embedding AI into their operational DNA, a move that could provide a significant competitive edge in the years to come.

This begs the question: Is BBU quietly constructing a Skynet for profits? A sprawling AI network designed to optimize every aspect of its business? While the reality may be less dramatic than a science fiction dystopia, the implications are far-reaching.

Hypothesis:

The early adoption and strategic integration of AI could lead to a significant expansion of BBU's already impressive EBITDA margins, which currently hover above 20%.

Supporting Evidence:

CDK Margin Improvement: BBU has already achieved a remarkable 1,000 basis point improvement in EBITDA margins at its CDK Global business, well ahead of its initial three-year target. This demonstrates their prowess in operational optimization, a skillset that could be amplified by AI. Clarios' AGM Shift: The increasing shift towards AGM batteries, which are twice as profitable as traditional batteries, at Clarios is a prime example of how technological shifts can dramatically impact profitability. AI could uncover and accelerate similar opportunities across BBU's portfolio.

Potential Numerical Impact:

Conservative Estimate: Assuming a 5% margin improvement across BBU's "Fabulous 5" businesses driven by AI-powered efficiencies, this could translate to an additional $125 million in annual EBITDA, based on their current annual EBITDA of approximately $2.5 billion. Aggressive Estimate: With broader AI integration and strategic application to new opportunities, a 10% margin improvement across the entire BBU portfolio could potentially yield an additional $250 million in annual EBITDA.

While these numbers are purely hypothetical, they highlight the potential magnitude of AI's impact on BBU's future profitability. The company's deliberate approach to AI integration, coupled with its track record of operational excellence, suggests that these gains may not be as far-fetched as they seem.

EBITDA Margin Growth of CDK Global

The following chart illustrates the actual and projected EBITDA margin improvement of CDK Global, showcasing BBU's ability to optimize operations.

It's clear that BBU is playing the long game with AI. They're not chasing short-term hype; they're laying the groundwork for a future where intelligent systems enhance their core strengths: acquiring undervalued assets, optimizing operations, and generating outsized returns. The investment world may be slow to catch on, but the AI whisperer is speaking. Will anyone listen before the profits start screaming?

"Fun Fact: Brookfield Business Partners is a spin-off of Brookfield Asset Management, one of the largest alternative asset managers in the world. This gives BBU access to a vast network of resources and expertise, including potential collaborations with other Brookfield entities that are also exploring AI applications. This ecosystem could accelerate BBU's AI development and provide a unique advantage in the competitive landscape."