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While Origin Energy continues to struggle, pharmaceutical/biotechnology giant CSL has come alive. Here is a chart comparing the two:
Origin Energy (ORG) has more than 4 million customers a
nd 33% market share in retail electrical distribution. While share market participants continue to punish ORG the major analyst community continues to love it. Deutsche Bank is the only major firm with a HOLD rating on the stock. Origin is an integrated energy company with a substantial interest in the Asia Pacific Liquefied Natural Gas (APLNG) project which has worried investors due to cost overruns and questions about both the demand for LNG and Australia’s ability to supply sufficient gas feedstocks for the liquefication facilities. It is interesting to note that analysts make no mention of brand value or brand recognition in their recommendation summaries.
The share price of CSL Limited (CSL) is rising despite mixed enthusiasm from analysts. Only Macquarie, JP Morgan, and BA Merrill Lynch have BUY or OVERWEIGHT ratings, with all the other major firms at HOLD or NEUTRAL.
There are three insurance companies in the table and a real estate company whose numbers bear some explaining. First, revenues come from premiums earned for the insurers and rents for Westfield Holdings (WDC) the real estate conglomerate. In addition, neither shows operating margins. For the insurers the value you see actually represents the net loss ratio, which measures how much premium dollars are paid out in claims. Unlike operating margins, higher net loss ratios are undesirable and Suncorp, AMP, and QBE all have net loss ratios above 60%.
While QBE is down about 3% year over year, AMP and SUN have seen solid price appreciation since July. Here is a chart comparing the two recent winners:
AMP also has a wealth management operation and at least one analyst at Morningstar credit the company’s strong brand as a competitive advantage. Deutsche Bank and Merrill Lynch are the only major firms with BUY ratings on AMP, while six of eight analysts have BUY or OUTPERFORM ratings on Suncorp, with only Macquarie and Credit Suisse at NEUTRAL.
Westfield Group (WDC) is a retail property group with a global reach. From January 2011 to January of 2012 the share price dropped 18% but is now up over 35% year over year:
Analysts have mixed opinions about Westfield, citing deteriorating conditions here in Australia and the modest recovery in the US. The most recent recommendations have BA Merrill Lynch and Deutsche Bank with BUY ratings, based largely on US market improvements and new development projects.
Toll Holdings (TOL) showed a 77% profit decline from FY 2011 to FY2012 and the share price is only down about 5% year over year, compared to a 26% drop from January 2011 to January 2012. The company has dominant market share here in Australia and is growing internationally.
Perhaps the most puzzling stock in the table is JB HiFi (JBH), the top shorted stock on the ASX for two years running. JBH’s brand value increased 6.8% while the stock price declined 36% during FY 2011 and is down over 30% so far year over year. A principal concern with JBH is operating margin, which declined 1.3% from FY 2011 to 2012. However, when you look at traditional valuation ratios, JBH and many of the shares in the table start to look better. Here is a table with forward looking valuations and a 2 year EPS forecast:
5 Yr Expected P/EG
2 Year EPS Growth Forecast
One share in the table stands out. Internationally, Qantas in the past was perhaps our most iconic brand. While it now ranks 14th in the top 30 list and the share price year over year is still trending downward (losing about 15 %,) the values in this table suggest a bright future for the beleaguered company. Along with Suncorp and Origin Energy, Qantas is now trading at around $1.32, below its book value per share of $2.62. It also has the highest 2 year EPS growth forecast and the lowest Price to Earnings Growth ratio.
So does all this mean brand value doesn’t matter? On a short term basis, it certainly appears that brand value itself is no guarantee of share price appreciation. However, products and services with high brand identification can enter new markets with an instant advantage and allow premium pricing in mature markets. To illustrate the importance of brand identification, one has only to recall the acquisition of UK based Cadbury candy by US food conglomerate Kraft Foods. Certainly Kraft had the technological capability to produce similar products. But Kraft wasn’t buying Cadbury candies; they were buying the Cadbury brand.
Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au. You should seek professional advice before making any investment decisions.