For decades business strategists and consultants have been trumpeting the long term competitive advantage of brand identification in the market place.  Corporations have spent millions in marketing campaigns to enhance the value of their “brand.”  A dollar figure for brand value is sometimes included as an intangible asset on a corporate balance sheet, although there is no standard method for calculating brand value in monetary terms.

The importance of establishing brand identification is universally agreed upon, but is brand value an indicator of a potentially attractive investment?  In theory a stock with the competitive advantage of high brand value will have greater pricing power and hence better margins than the stock with a less recognized brand.  The prospect of future growth should act to insulate high brand value stocks during tough market climates.

Well, let’s see.  Every year a London based consulting firm called Brand Finance publishes a list of the Top 30 Most Valuable Brands in Australia using a discounted cash flow model to assign a dollar brand value.  A few companies are privately owned but we can examine some of the publicly traded corporations to get a sense of whether or not a strong brand leads to strong share price performance.

We culled the list to come up with 10 brands we can compare that might shed some light on that question.  First, we eliminated the number 1 brand in Australia – Woolworths (WOW) because one of its subsidiaries (Big W) is also on the list.  Coles, Target, and Kmart also made the Top 30 list but we eliminated them because they are part of Wesfarmers (WES).  Due to the complexities of their financial reporting, we eliminated the big banks but kept the easier to understand insurance companies.  Finally, big name retailers like Harvey Norman (HVN), David Jones (DNS), and Myers (MYR), showed such substantial losses in brand value as to make them less useful for comparison purposes.

The table shows each company and its Brand Value as calculated by Brand Finance as well as the percentage change in value year over year.  Finally, we calculated the share price percentage change over the same 2011 to 2012 period.  Here is the table: 

 

 

Company

 

Code

 

Market Cap

 

Sector

 

Brand Value

2011-12

BV Change

2011-12

 Price Change

Telstra

TLS

$48.96 billion

Telco

$5.13 billion

+6.1%

+19.8%

QBE

QBE

$16.06 billion

Insurance

$1.4 billion

+1.2%

-28.6%

Suncorp

SUN

$12.1 billion

Insurance

$1.2 billion

-9.1%

-0.04%

Qantas

QAN

$2.9 billion

Transport

$996 million

-9.7%

-42.5%

Amp Ltd

AMP

$12.96 billion

Insurance

$863 million

+1.1%

-23%

Westfield

WDC

$23.46 billion

Real Estate

$697 million

-1.0%

-18.4%

Origin

ORG

$12.7 billion

Energy

$575 million

+23.4%

-19.9%

CSL

CSL

$28.85 billion

Pharma/Bio

$518 million

+14.8%

-11.8%

Toll

TOLL

$3.1 billion

Transport

$458 million

-1.0%

-26.4%

JB HiFi

JBH

$973 million

Retail

$409 million

+6.8%

-36.9%

 

Telstra (TLS) at $5.13 billion is the second most valuable brand in Australia, right behind Woolworths with a brand value of $7.06 billion.  TLS is the only share in the table where both brand value and share price went up.  Admittedly 2011 was a dreadful year for shares, but how did Telstra do so well while companies like Origin Energy and CSL Ltd showed substantial increases in brand value while the share price plummeted?  How can JBH increase its brand value and drop about 37% in share price?  What about companies like QBE and AMP that showed modest rises in brand value yet suffered share price declines of more than 20?

While one could draw the conclusion that brand value is an excessively hyped advantage, we should look first to some of the fundamentals of these companies to see if performance was poor enough to trump the brand value advantage.  Here are some key fundamental indicators comparing 2012 performance to 2011 performance for each of these companies:

 

 

 

Company

 

 

Code

 

Revenue

2012/2011

$m

 

NPAT

2012/

2011

$m

 

Op Csh Flw

2012/2011

$m

 

Op Mgn

2012/

2011

%

 

ROE

2012/2011

%

Telstra

TLS

$25,357 / $25,129

$3,405 / $3,231

$9,276 / $8,018

42.4%  /40.4%

34.1% / 26.8%

QBE*

QBE*

$16,733 / $12,838*

$693.2 / $1,257

$2,106 / $1,340

66.4% / 59.9%*

6.8% / 12.4%

Suncorp

SUN*

$9,277 / $8,672*

$724 / $453

$2,280 / $11,054

74.5% / 0

5.1% / 4.1%

Qantas

QAN

$15,696 / $14,894

-$245 / $250

$16,699 / $15,545

10.5% / 11.4%

3.4% / 4.3%

Amp Ltd

AMP*

$16,294 / $12,491

$688 / $755

$3,554 / $2,464

94.9% / 119.9%

13.3% / 25%

Westfield

WDC*

$3,406 / $3.957

$1,532 / $1,114

$2,335 / $2,457

1.6% / 0.5%

8.5% / 10.6%

Origin

ORG

$12,935 / $10,344

$893 / $673

$1,822 / $1,401

17.7% / 18.9%

6.8% / 5.5%

CSL Ltd

CSL

$4,654 / $4,303

$4,582 / $4,293

$1,160 / $1,018

30.2% / 30.4%

28.7% / 25.8%

Toll

TOLL

$8,707 / $8,237

$64.6 / $281.4

$9,347 / $8,849

8% / 8.3%

9.8% / 10%

JB HiFi

JBH

$3,127 / $2,959

$104.6 / $109.7

$215 / $109

6.2% / 7.5%

56.7% / 88.2%

 

Telstra is the only company in the table that showed an increase in every metric.  Revenue, NPAT, operating cash flow, operating margins, and return on equity all increased from 2011 to 2012.  However, if you dig into the numbers you see that both ORG and CSL also improved in every category, with slight declines in operating margins.  Let’s look at how these three companies have done year over year, starting with Telstra.  Here is the company’s price chart compared to the XJO:

Despite solid fundamentals and a 28% share price increase year over year, analysts are lukewarm about Telstra’s prospects going forward.  In August both Macquarie and Credit Suisse downgraded the stock to NEUTRAL, based on valuation grounds.  Citi, Deutsche Bank, RBS Australia, JP Morgan Chase, and BA Merrill Lynch all have HOLD ratings also citing the stock price as overvalued.  However, you can see from the chart the share price is still below the RSI value of 70, a technical indicator of an oversold condition.

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