Brand As A Way To Evaluate Stocks

Brand As A Way To Evaluate Stocks

Thu, 17 Feb 2011

Does the power - or lack thereof - of a business' brand come into play when evaluating stock value? It seems so. One of the world's most successful investors, Warren Buffett, consistently incorporates an understanding of a company's brand into his list of requirements for investing.

In a recent article, Buffett looked at the top Aussie stocks he would consider investing in. Each of his recommendations highlights the qualities and strength of that businesses brand. In the article, Buffett list his six key considerations when purchasing stock. Coming in at number #2 is the power of brand, specifically to leverage stand out identity in competitive markets. In his words, "While a monopoly would be great, they are rarely available, so a strongly branded business that can pass on higher costs to customers via price increases is desirable."

Brands Translate to Good Returns

Warren Buffett has been referred to as a "brand investor." Most of his investments are with highly regarded brand names - Coke, Wrigely, Gilette, Kraft Foods, Johnson and Johnson and others. Buffett's understanding is that even though a strongly branded business may experience a range of degrees of success within their own portfolio, their qualities - backed by strong management and good marketing - will translate to consistent and above average returns over a long time period.

On his website, Warren Buffett continues to extol the importance of brand in considering which stocks are worthy of investment. Possessing a strong brand name gives businesses a "big advantage." The first advantge is that the customer knows the name and the product or service that it represents. In the case of consumer products, distributors need to stock the product (a supermarket without Coke is a rare thing), and brand power allows the company to keep pace with inflation with price rises in a way that unbranded companies cannot.

Good Brands Are Stronger In The Market

Businesses with a strong brand presence can change more for their products and services than less established competitors, and their loyal customer base will help them weather storms with more ease. They will be able to leverage their name recognition to increase business, and their entrenchment in the market place will make it harder for new entrants to gain market share.

Robert Millen is chairman and portfolio manager of Jensen Investment Management, is another investor who places brand as a foremost consideration in his investment approach. He has recently said, "brands themselves are what one might call soft assets - they don't actually show up in the balance sheet of a company's financial statements, but the value of that brand is clearly in the business - and it takes years and years to build. Once you've built that strength and you continue to feed it and support it over time, then you get . . . pricing power that allows the business to maintain margins throughout varying economic periods. Secondly, you get repeat business. And those two things lead to consistent earnings."

This approach to investment reinforces the financial and investable return gained from executing a powerful brand strategy.

 

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