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The Value Of A Brand
Posted by B2B on: 2006-01-04 09:55:25
The Value Of A Brand
Hari Wibowo
Brand name of a product has certain value to a company. How do
we value a brand and how does it affect the fair value of a
common stock? There is no definite way of doing it since a brand
is worth more to some than to other people.
Brand is valued in the balance sheet under 'Intangible Assets'
or 'Goodwill'.. Each company values their brand differently but
they all agree that brand name has certain value.
What is the best way to value a brand? Nobody knows for sure.
One can only give his reasoning and then value the brand
accordingly. Here, I will explore the possibility of valuing a
brand based on asset value and based on the value of the common
stock.
Let's use a familiar brand name. Coca Cola Company (KO) has one
of the most valuable brand in the world under the Coke brand
name. How much is it worth? We can go to any grocery stores to
verify. Grab a bottle of Coke and a bottle of generic cola. What
is the price difference? We can argue that the price difference
is due to the Coke brand name. Let's assume a price difference
of 10 cents. Let's assume that Coke sold 1 Billion bottles of
Cokes each year. This implies an additional $ 100 Million due to
value of Coke brand. What is the fair value of a brand? Assuming
a 7.5% yield (P/E of 13.4), the value of Coke brand is $ 1.34
Billion.
Please note that this is a very rough estimation of brand value
. We just assume the same 10 cents product differential
everywhere. Coke sells to almost every corner of the world and
the price differential is not always 10 cents every time.
Furthermore, as you may know, if Coca Cola is not selling that
much Coke this year, the value of the brand will drop and vice
versa. Therefore, the value of the Coke brand will fluctuate
depending on the sales of the product. Supply disruption will
result in lower sales. If there is a disruption in supply, which
has nothing to do with brand value, the value of the brand will
decrease as well.
Should we care about the value of a brand when investing in the
stock? Yes and No. Yes, if you are valuing the company on the
basis of asset value. If the value of the brand is a significant
part of the balance sheet, then you should include it to value
the overall net asset of the company. If a stock is traded at $
10 per share while the net book value with the brand value
included is $ 15 per share, then investors might profit by
buying the stock at $ 10 per share.
For our version of fair value, valuing a brand name is not
necessary. This is because the fair value of a common stock is
correlated with the profits generated by the company. What is
the brand name of Enron when it cannot produce a profit under
this scenario? Zero. In general, we should not care much about
the value of a specific brand. All we are trying to do as
investors is to buy undervalued investments. We should compare
the profit generated by the company with the price of the common
stock, not with the value of the brand.
About the author:
Finding the fair value of a common stock is more important than
the fair value of a brand. You can get free investing lesson by
visiting http://www.noviceinvesting.com
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