Century-Old Consumer Brands: A Great Resource To Find Moaty Businesses

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Includes: BF.A, BF.B, CL, CLX, GE, HESAF, HESAY, IBM, KO, UL, UN
by: Steven Chen
Summary

Moaty businesses are rare and often hard to find.

Consumer brands that can survive and thrive for more than a century are strongly indicating some sustainable competitive edge.

I list my favorite picks of century-old brands from a value/quality investing perspective.

Source: pammarketingnut.com

Overview

Many great investors (like Terry Smith) have this interesting metric to calculate for their managed portfolio: the average "age" of invested companies. Although there does not seem to be a correlation between the equity return and the age, companies with a long history are at least demonstrating their capabilities of enduring through different economic cycles, industry dynamics, and competitive threats. A portfolio full of such companies should have better protection to the downside risk and thus increase its probability of outperforming for the long run, if you believe that "the best offense is a good defense."

In my view, such a theory may even work better for consumer brands. After all, businesses can pivot and diversify over time (think about IBM Corp. (IBM) and General Electric (GE) here). But what if consumers have been loyal to the same brand of product for a century or even longer? That is a strong indication for sustainable competitive advantages, enabling businesses to survive and thrive in this "dog-eat-dog" capitalist world.

Moaty companies are rare and often hard to find. I believe that century-old consumer brands are a great resource for value/quality investors to start with. Of course, before drawing any conclusion, investors still need to carefully examine the business economics and make sure the brand is relevant and meaningful from the equity owner's perspective.

I list a couple of examples below, and as you can see soon, these brands have shown great resilience over a long period of time, surviving two world wars, the Great Depression, and the Global Financial Crisis, among many other tough times.

Colgate (CL) - 146 Years Old

Source: Company website

Colgate debuted its "Colgate aromatic toothpaste in jars" in 1873 before it merged with soap company Palmolive in 1928. Today, Colgate-Palmolive generates almost 50% of total revenue through its oral care products (mostly under the Colgate brand) sold in more than 200 countries and territories worldwide.

Moreover, Colgate has been the most penetrated brand in the world (see below), even beating Coca-Cola (KO) and Dove (UL, UN).

Source: Investor Presentation, June 2019

Thanks to the strong branding power, the company has been generating superior returns on tangible assets and maintaining decent profit margins (see below). Both metrics also beat most of the company's competitors, as demonstrated below.

Source: GuruFocus; data as of 8/29/2019

Source: GuruFocus; data as of 8/29/2019

Source: GuruFocus; data as of 8/29/2019

Source: GuruFocus; data as of 8/29/2019

Clorox (CLX) - 105 Years Old

Source: Flickr.com

In 1913, five California entrepreneurs invested $100 each to set up America’s first commercial-scale liquid bleach factory, which they located in Oakland, on the east side of San Francisco Bay. One year later, they named their product Clorox, coined as a portmanteau of chlorine and sodium hydroxide, the two main ingredients.

Fast forward to today, Clorox Co. is now a leading multinational manufacturer and marketer of a diversified portfolio of consumer and professional products. Most of the sales are generated from the No.1 or No.2 brands in the respective categories (see below), including Clorox bleach, of course.

Source: Investor Presentation, February 2019

The brand name "Clorox" even achieved its verb status when Sen. Kirsten Gillibrand's remark, "I am going to Clorox the Oval Office," sparked reactions on social media, which implies an even-widening moat.

As you can imagine, the company consistently delivered high capital efficiency and pricing power due to its leading brands in the portfolio (see below).

Source: GuruFocus; data as of 8/29/2019

Source: GuruFocus; data as of 8/29/2019

Source: GuruFocus; data as of 8/29/2019

Source: GuruFocus; data as of 8/29/2019

Hermes (OTCPK:HESAY, OTCPK:HESAF) - 182 Years Old

Source: LePrix.com

Hermes was founded by Thierry Hermes in 1837 and quickly evolved into one of the top names in the saddlery industry, thanks to its beautiful and carefully crafted leather saddles. Then, in 1922, the company introduced the first-ever leather bags for people - rather than horses - to the fashion world.

The leather goods and saddlery business has always been the most significant part of Hermes, contributing to around 50% of total sales this year (see below).

Source: Company website; data as of 8/29/2019

Also, leveraging a strong brand, the company expand into adjacencies, such as silk & textiles and perfumes. For so long, Hermes has been synonymous with luxury and high end, and hence, earned a spot in many closets of the rich, famous and stylish.

Driven by the long-lasting brand name, Hermes has maintained its margins and returns on tangible assets at superior levels. The 70% gross margin is almost unheard of at any of its peers in the industry.

Source: GuruFocus; data as of 8/29/2019

Source: GuruFocus; data as of 8/29/2019

Source: GuruFocus; data as of 8/29/2019

Source: GuruFocus; data as of 8/29/2019

Jack Daniel's (BF.B, BF.A) - 153 Years Old

Source: TheCultureTrip.com

Jack Daniel’s signature tasting whiskey is synonymous with southern living. The world’s best-selling whiskey comes from North America’s oldest registered distillery, the Jack Daniel Distillery, founded in 1866 by Mr. Jack Daniel.

More than one and a half centuries later, the Jack Daniel’s family of brands is now the primary contributor of revenue and driver of growth for its parent company, Brown-Forman Corporation.

These brands have their extremely loyal customer base, which helps the company consistently earn top-notch ROICs and margins in the industry (see below). Also note the company's best-in-class 22% return on tangible assets.

Source: GuruFocus; data as of 8/29/2019

Source: GuruFocus; data as of 8/29/2019

Source: GuruFocus; data as of 8/29/2019

Source: GuruFocus; data as of 8/29/2019

Vimto (NICL.LON) - 107 Years Old

Source: Rinnoo.net

Our last century-old brand today is a bit less known. Vimto was created in 1908 by Noel Nichols at his small, wholesale druggist and herbalist business in Manchester, UK. It was originally launched as a herbal tonic that gave the drinker "vim and vigour," therefore under the name Vim Tonic, which Mr. Nichols soon shortened to Vimto in 1912.

Today, Vimto is sold in over 85 countries in a variety of formats. The brand is firmly established and has gained considerable popularity in the Middle East, Africa and the home country, UK, of course.

Leveraging the iconic brand, parent company Nichols PLC generated consistently high profitability (i.e., gross margins always above 40% for the past 10 years) and capital efficiency (i.e., always double-digit ROA/ROE/ROIC for the past 10 years), as you can see below.

Source: Morningstar; data as of 8/29/2019

Source: Morningstar; data as of 8/29/2019

Nichols PLC is only listed in the UK. Interested investors have to trade directly on the London Stock Exchange (the ticker is NICL).

Summary

As discussed above, century-old brands may offer wide and deep economic moats for long-term investors. The picks cover brands aged from a little over 100 to almost 200 years old and products ranging from soft drink and whiskey to toothpaste/toothbrush, bleach and luxury goods. The commonality among their businesses are consistently superior and industry-leading returns on capital and margins, which signal durable competitive advantages.

What is your favorite century-old brand from an investor's perspective? Feel free to comment below.

Disclosure: I am/we are long HESAY, CLX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Mentioning of any stock in the article does not constitute investment recommendations. Investors should always conduct careful analysis themselves and/or consult with their investment advisors before acting in the stock market.