Valuing A Brand Name

Valuing A Brand Name

Last week, the business news was all on 𝐁𝐫𝐚𝐧𝐝 𝐕𝐚𝐥𝐮𝐞. First, the IT services firms had rankings on brand value; further, the 𝐆𝐥𝐨𝐛𝐚𝐥 𝟓𝟎𝟎 𝐫𝐞𝐩𝐨𝐫𝐭 𝐛𝐲 𝐁𝐫𝐚𝐧𝐝 𝐝𝐢𝐫𝐞𝐜𝐭𝐨𝐫𝐲 came up with their rankings and declared Apple as the most valuable global brand.

𝐇𝐨𝐰 𝐝𝐨𝐞𝐬 𝐨𝐧𝐞 𝐯𝐚𝐥𝐮𝐞 𝐚 𝐅𝐢𝐫𝐦’𝐬 𝐁𝐫𝐚𝐧𝐝?
Every company in their marketing pitch declares itself as a famous brand to acquire new business. Further, the accountants do not report the brand’s value on the balance sheet, making it more challenging for an analyst valuing the company to assess if the brand affects its value.

For instance, The Coca-Cola Company‘s most significant intangible asset – brand value does not get reported in the balance sheet, and the same applies to McDonald’s, PepsiCo, and Wrigley.

𝙒𝙖𝙧𝙧𝙚𝙣 𝘽𝙪𝙛𝙛𝙚𝙩 𝙩𝙚𝙧𝙢𝙨 𝙞𝙩 𝙡𝙞𝙠𝙚 𝙖 𝙢𝙤𝙖𝙩, 𝙬𝙝𝙞𝙘𝙝 𝙞𝙨 𝙖 𝙨𝙞𝙜𝙣𝙞𝙛𝙞𝙘𝙖𝙣𝙩 𝙛𝙖𝙘𝙩𝙤𝙧 𝙬𝙝𝙚𝙣 𝙝𝙚 𝙞𝙣𝙫𝙚𝙨𝙩𝙨 𝙞𝙣 𝙖 𝙘𝙤𝙢𝙥𝙖𝙣𝙮.

I have seen analysts adding a brand premium at the top of intrinsic value to justify the valuation. I believe it is wrong as DCF valuation should capture the brand value.

In my view, a brand should give a company a 𝙙𝙪𝙧𝙖𝙗𝙡𝙚 𝙘𝙤𝙢𝙥𝙚𝙩𝙞𝙩𝙞𝙫𝙚 𝙖𝙙𝙫𝙖𝙣𝙩𝙖𝙜𝙚 𝙛𝙤𝙡𝙡𝙤𝙬𝙚𝙙 𝙗𝙮 𝙡𝙤𝙣𝙜-𝙩𝙚𝙧𝙢 𝙚𝙖𝙧𝙣𝙞𝙣𝙜 𝙥𝙤𝙬𝙚𝙧. A firm with high brand value should have the following:

•Pricing power
•Cost advantage
•High growth period
•Higher ROIC and low reinvestment needs

To substantiate my hypothesis, i took two companies in the smartphone segment – Apple and Xiaomi Technology and valued them by DCF.

•Apple’s 𝐑𝐎𝐈𝐂 𝐢𝐬 𝟔𝟐.𝟓𝟓% after capitalising on their R&D expenses, and for Xiaomi, it is 𝟏𝟓.𝟔𝟐%
•Xiaomi is reinvesting far more than Apple, reflected in its EBIT growth rate.

If I keep all things constant, and 𝗿𝗲𝗽𝗹𝗮𝗰𝗲 𝗔𝗽𝗽𝗹𝗲’𝘀 𝗥𝗢𝗜𝗖 𝗮𝗻𝗱 𝗿𝗲𝗶𝗻𝘃𝗲𝘀𝘁𝗺𝗲𝗻𝘁 𝘄𝗶𝘁𝗵 𝗫𝗶𝗮𝗼𝗺𝗶’𝘀, 𝗔𝗽𝗽𝗹𝗲’𝘀 𝘃𝗮𝗹𝘂𝗲 𝗿𝗲𝗱𝘂𝗰𝗲𝘀 𝗳𝗿𝗼𝗺 𝟯.𝟲 𝘁𝗿𝗶𝗹𝗹𝗶𝗼𝗻 𝘁𝗼 𝟮 𝘁𝗿𝗶𝗹𝗹𝗶𝗼𝗻.

If i assume that 30% of this difference is due to Apple’s brand and 70% is due to its technological superiority, i arrive at 𝐀𝐩𝐩𝐥𝐞’𝐬 𝐛𝐫𝐚𝐧𝐝 𝐯𝐚𝐥𝐮𝐞 𝐚𝐭 $𝟒𝟕𝟒 𝐛𝐢𝐥𝐥𝐢𝐨𝐧.

Companies like The Coca-Cola Company and Wrigley can assume 100% brand value because their products do not differentiate from their competition.