If you gave me $100 billion and said, 'Take away the soft-drink leadership of Coca-Cola in the world,' I'd give it back to you and say it can't be done. -- Warren Buffett
The quote above emphasizes the importance of brands. Each year Interbrand determines the best 100 global brands based this criteria:
There are three key aspects that contribute to the assessment: the financial performance of the branded products or services, the role of brand in the purchase decision process, and the strength of the brand.
The World's Top Brands
The full Interbrand list is here. The top five brands globally are Coca-Cola (KO), IBM (IBM), Microsoft (MSFT), Google (GOOG) and GE (GE). However, what is more interesting is how the valuation of the brand compares with the enterprise value (market cap + debt) of the companies listed. This methodology can be another way to determine attractive investments, since brands can create a distinct economic moat, as the Buffett quote demonstrates.
Relating Brand Value To Enterprise Value
It gets particularly interesting when the Interbrand valuation represents a large proportion of the enterprise value. Here I divide the brand value as calculated by Interbrand into the Enterprise Value of the company to determine what percentage of the total EV the brand represents. Typical the value of a brand is <30% of enterprise value, and of course this is just the top 100 brands in the world, so most S&P 500 companies don't even make the list.
Three Brands That Are Trading At A Discount
Three companies stand out as being particularly cheap relative to Interbrand's brand methodology, of the 100 brands listed, these are the only 3 where the brand value accounts for over half the company's EV:
|Company||Global Brand Rank||Brand Value||Enterprise Value||Brand/Enterprise Value|
|Hewlett Packard (HPQ)||10th||$28.4B||$35.1B||89%|
|Louis Vuitton Moet Hennessy (MAGOF.PK)||18th (LV) and 77th (Moet)||$27.5B||$20.7B||63%|
EV is market cap + debt; cash and short term investments are not backed out.
Clearly, both Nokia and Hewlett Packard are troubled companies facing a need to reposition themselves in core markets against new competitive threats, but it is important to remember the value of their brands in helping with this challenge.
LVMH is a different story, with a significantly higher valuation. It is a French-listed company and a less liquid stock on US markets, but it has a broad portfolio of brands growing revenue in the double digits. In is also one of a handful of companies that has two separate brands on the list. The story here is just how valuable the brands Louis Vuitton and Moet & Chandon are relative to the size of the company.
Below are valuation metrics for reference:
|Louis Vuitton Moet Hennessy||17.7x||3.3x||1.99%|
In looking at financial data it can be easy to overlook how powerful brands are in creating and sustaining long term value for shareholders. Particularly in the context of their current problems, Nokia and Hewlett-Packard are both attractive value investments when you consider the value of their brands in shaping purchase behavior for the medium term. LVMH is also an interesting name to explore if you are comfortable with the international exposure and relatively higher valuation.
Sources: Buffett quotes; Interbrand study.
Disclosure: I am long NOK. I may initiate a long position in HPQ over the next 72 hours.