Brand Equity is an intangible asset, but possibly one of the most important ones in value investing. Companies with strong brand equity, usually those that have been building brand equity for years via clever or persistent marketing such as Coca Cola, Nike, etc., often prove to be better investments even when their price drops, because the brand equity created by past marketing efforts has an effect on profits going forward. This can protect the company from losing too much revenue and market share.
Deciding which brands have lots of equity is not always easy. Avoid brands that are based on individual names or at least those associated too much with individuals because you never know what an individual might get up to; witness the recent events surrounding Tiger Woods and their effect on his own brand, plus those of Gillette, Nike, Accenture – the latter having just ended their agreement with Woods, presumably to protect their own brand. This kind of negative press attention can also be catastrophic for even company and product brand names: for example, Halliburton, and various drugs – Merck’s Vioxx comes to mind. Measurement of brand equity is carried out at three levels – the firm level, product level and consumer level.
At the firm level, brand equity is market capitalization minus tangible and measureable intangible assets. At the product level, it is simply the differential in price between a branded product and a no-name competitor equivalent product (not always easy to measure unless you can find a knockoff). At the consumer level, measurement is not easy to come by, and is usually carried out by market research firms. But, as value investors we can probably figure out
two out of three and assume the third from what we already know about the firm or product, much in the same way Peter Lynch described in his excellent book, One Up On Wall Street : How To Use What You Already Know To Make Money In The Market
Let’s say you find an undervalued stock on one of The Graham Investor’s screens – you might ask yourself if it has any brand equity. Or, indeed, look for stocks in the list with brands you are aware of first. I asked myself that queston with Adams Golf (ADGF), and it was not difficult to figure out that Adams has a great deal of brand equity amongst golfers. I had a quick look at this week’s screen and, apart from ADGF, a quick scan gives some further names with brand equity (they will often jump out at you) – Heelys, Inc. (HLYS), Adaptec (ADPT), Hauppuage (HAUP), Comdisco Holdings (CDCO), Imation (IMN).
Of course, due diligence is still a must. Some of these companies do need a wide berth. Comdisco went into Chapter 11, and is undergoing dissolution, but I still remember the “Comdisco” brand name from way back in the tech bubble era. Take a look at the screens yourself and see if any particular brands stand out.
