Brand Value vs. Book Value

by: Victor Cook

The brand name "Harley-Davidson" (NYSE: HOG) has a market value of $7,718 million according to the 2007 Interbrand report. Yet, in its 2006 financial statement the company reported the value of intangible assets is just $59 million. Let's see, that means the name value is 131 times greater than the book value.

What's going on here? In her article in the Sunday Times, Denise Caruso, executive director of the Hybrid Vigor Institute, had this to say about valuing corporate assets:

TODAY’S sophisticated knowledge economy is stuck with the equivalent of an abacus for measuring the actual financial value of corporate assets and liabilities. At issue is a growing collection of crucial resources known as intangibles: assets or liabilities that have no obvious physical presence, but that represent real value or vulnerabilities. Patents, trademarks, copyrights and brand recognition are most commonly recognized as intangibles.

To drive home her point, the value of Harley-Davidson's corporate brand is 40% greater than the value of the company's total assets of $5,532! And it accounts for 42% of the company's market cap of $18.2 billion. What does Interbrand know that HOG's accountants don't know: the power of a brand name.

BusinessWeek chose Interbrand's methodology because it evaluates brand value in the same way any other corporate asset is valued—on the basis of how much it is likely to earn for the company in the future. Interbrand uses a combination of analysts' projections, company financial documents, and its own qualitative and quantitative analysis to arrive at a net present value of those earnings.

This is the 4th in my series of posts on brands. The first, "Sears Brand Bonds," (NASDAQ:SHLD) was followed by "Coca-Cola's Brand Bonds" (NYSE:KO). And last week I posted an article on "Southwest Airlines Should Put LUV in Its Logo" (NYSE:LUV). In this post I compare the book value of intangible assets with the market value that Interbrand places on 49 of the top 100 global brands. The approach is based in part on an analysis of intangible market value in my book Competing for Customers and Capital.

Some Balance Sheets Collide With Reality

Few of Interbrand's top 100 companies undervalue intangible assets to the extent that Harley-Davidson did. But it's not alone in the stratosphere of intangible miss-valuations. Tiffany & Company (NYSE: TIF) is in the same orbit with a brand value to book value ratio of 130. Interbrand's valuation of Tiffany's is $4,003 million with a balance sheet intangible value of just $31 million. Not far behind is Gap's (NYSE: GPS) ratio of 114 which is based on a brand value of $5,481 versus a book value of $48 million.

Only 49 of Interbrand's top 100 best brands reported the data necessary for this analysis based on S&P's COMPUTSTAT database in 2006 downloaded from Wharton Research Data Services. The most important cause of missing data was due to foreign companies not listing on U.S. stock exchanges. And most offshore financial accounting regulations do not require (or do not recognize) "intangible assets" at all.

Consider the top 28 most valuable brands that reported intangible assets on their balance sheets, where these assets were less than half their Interbrand value. If you add up the Interbrand valuations ($475.5 billion) and compared them with their balance sheet value of intangibles ($65.9 billion) you get a miss-valuation ratio of 7.2 times.

Some Balance Sheets Flirt With Reality

To be fair to the accountants for companies that own 14 brands in the top 100 most valuable brands have book values that are "pretty close" to Interbrand's valuations. My measure of "pretty close" is that Interbrand valuations are no more than double the balance sheet values and these in turn are no more than double the Interbrand values. On the high end of this range is Kellogg (NYSE: K) with intangibles valued at $4,868 million on its 2006 balance sheet with an Interbrand value of $9,341 million. On the lower end is Citigroup (NYSE: C) with an intangible asset value of $49,316 million compared with an Interbrand value of $23,443.

The combined book value of intangibles reported by these 14 companies is $200.9 billion. Their combined Interbrand value is $192.7 billion. The brand to book value ratio is about one. To view the data on which this post is based see here.

What Drives Intangible Value?

For a preliminary answer to this question see my post on "Intangible Value Drivers." If you really want to know how enterprise marketing expenses drive intangible market value, and in turn add to (or diminish) shareholder wealth, read my book Competing for Customers and Capital. Then tell me what you think.

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