a short note on value of brand name

[jigar pobari]

The Value of a Brand Name
From Net Income to Operating Income and Equity to Value

The profits margins for firms can be stated in terms of net income (as they have in all the examples so far) or in terms of operating income (EBIT). If pre-tax operating margins are used, the appropriate value estimate is that of the firm. In particular, if one makes the assumption that
Free Cash Flow to the Firm = EBIT (1 - tax rate): Net Capital exp. and working capital needs are zero.
Then the Value of the Firm can be written as a function of the after-tax operating margin= (EBIT (1-t)/Sales

where,

g = Growth rate in after-tax operating income for the first n years

gn = Growth rate in after-tax operating income after n years forever (Stable growth rate)

WACC = Weighted average cost of capital
The value of a brand name
• One of the critiques of valuation is that is fails to consider the value of brand names and other intangibles.
• The approaches used by analysts to value brand names are often ad-hoc and may significantly overstate or understate their value. Firms with well known brand names often sell for higher multiples than lesser-known firms. The standard practice of adding on a 'brand name premium', often set arbitrarily, to discounted cashflow value, can lead to erroneous estimates.
• One of the benefits of having a well-known and respected brand name is that firms can charge higher prices for the same products, leading to higher profit margins and hence to higher price-sales ratios and firm value. The larger the price premium that a firm can charge, the greater is the value of the brand name.
brand value is most commonly defined as the value added to the product by the brand. I would define it more specifically, for measurement purposes, as the relative ability of a brand to bias customer choice. In turn, a brand’s value I would argue, depends on its ability to reliably indicate attributes of value to a customer. In other words, a brand’s value - to customers – depends on its ability to act as a reliable predictor of what to expect after purchase.
In general, the value of a brand name can be written as:
Value of brand name ={(V/S)b-(V/S)g }* Sales

(V/S)b = Value of Firm/Sales ratio of the firm with the benefit of the brand name

(V/S)g = Value of Firm/Sales ratio of the firm with the generic product

Illustration : Valuing a brand name: Kelloggs

The following is an analysis of brand name value at Kellogg Corporation. The estimates for Kellogg were obtained from 1994 financial statements. The after-tax operating margin for the generic substitute was obtained by looking at a private-brand cereal manufacturer. The expected growth is assumed to be

Expected growth in after-tax operating income = Retention Ratio * Return on Assets
Kellogg's Generic Substitute
Pre-tax Operating Margin 22.00% 10.50%
After-tax Operating Margin 14.08% 6.72%
Return on Assets 32.60% 15.00%
Retention Ratio 56.00% 56.00%
Expected Growth 18.26% 8.40%
Length of High Growth Period 5 5
Cost of Equity 13.00% 13.00%
E/(D+E) 92.16% 92.16%
D/(D+E) 8.50% 8.50%
Value/Sales Ratio 3.39 1.10


Value of Kellogg Brand Name = ( 3.39 - 1.10) ($6562 million) = $15,026 million

Value of Kellogg as a company = 3.39 ($6562 million) = $22,271 million
Approximately 67.70% ($15026/$22271) of the value of the company can be traced to brand name value

The danger of double-counting the value of a brand name
The value of a brand name results in higher growth and higher value for the firm owning it. There are some analyses where the brand name value is double counted. To provide an illustration of how this could happen, assume that Coca Cola is valued using a discounted cashflow model and that the expected growth rate used in the valuation is 29.55%. This value already incorporates the value of the brand name through the use of the high growth rate. If an additional value is now assigned to the brand name, the brand name value is double counted.

 

[gargi.n]

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.