(Finale of posts part I & part II)
Putting it all together:
Clearly there’s an importance to a company on how consumers of their target market interact with their brands, products or services. The lesson in all of this relates back to my 5% Rule. When a company secures strong brand loyalty within its consumer base, the predictability of purchasing habits among that group offers significant value over a company who might be exposed to infrequent consumer purchases of its products based solely on price or availability. This helps to add stability to business operations and begins to secure the first essential steps of creating a competitive advantage. When your products or services are able to generate the points I’ve explained over this two part series, then a company is one to watch closely from an investment standpoint. When it gets cheap from based on valuation standpoint and you understand the company’s long-term fundamentals, the value of its brands becomes much more important for a variety of reasons. (See JNJ)
History has shown that often a larger competitor may decide at some point that another brand offers added value to their own product line when the smaller company may experience turmoil or show difficulty in sustaining cash flow, sales, profitability or operational excellence. Often these problems arise not from troubles with the brands, but how the company itself is run by management on poor decisions.
FDP is a great example of a company I bought for my Value Port in November of 2006 at $15.05/share. The company sells prepared fruits, vegetables, juices, snacks and desserts under the brand name of Fresh Del Monte & Del Monte. If you have kids, you most likely have at least one of their products somewhere in your house. The stock had been beaten up because of profitability issues with its Hawaiian pineapple division, higher food costs and allegations of dealings with organizations (drug cartels) in South America. Yet with the brand recognition of the company, its current portfolio of products and other assets on the balance sheet, I assessed a minimum NAV (net asset value) of $20/share. I sold my entire position at the end of May in 2007 at just over $24/share. The company turned around its operations by selling the Hawaiian division and returning profitability to operations through cost cutting initiatives, but my main focus with the purchase was the substantial margin of safety (MoS) of approximately 30% at the time of purchase. Whenever I calculate an entry point for this portfolio, I try my best to assess the NAV of the company, as well as a conservative MoS in order to justify the purchase (most often in excess of 15%). The higher I perceive risk, the higher my MoS needs to be. If I’m taking additional risk in a position due to any unknowns or perceived threats, I want to ensure that the value of existing assets is sufficient enough that replacing those assets, production or purchase value of its brands by another company is greater than what I’ve paid.
Other examples have been my past purchases of SJM (Smuckers Jam) & JBSS (Fisher Nuts) and current holdings in ALL (Allstate Insurance) which all share strong brand associations with their target base of customers. From a non-value perspective – P&G, which I hold in my Health Port, is another great example of a company that concentrates religiously on its consumer base to create value.
Although each of us may have been aware of some of these habits in our own consumer spending habits…you may find yourself more aware on your next shopping trip of just how large of an impact branding plays in your decisions without you ever noticing. Keeping all of these concepts in mind when assessing a potential investment can help you to gain a greater insight into the influence a company’s brand may have with its target market. Also remember; even though brands are important with reference to consumers, there is a portion of consumers who give no discretion to brands in certain situations and any product will do. The situation may be very different company to company and being aware of those differences can help you from getting involved in a value trap.