One of my top qualitative Value Rules deals directly with the importance of brand power a company creates in relationship to their business operations. This traditionally is a component of any S.A. and what many investors fail to recognize as creating significant value for a company when present or improving.
When we think of Coca-Cola, McDonald’s, United Postal Service, Tim Horton’s or even Rolex…we often associate those names with the products/services they provide to us. Rarely do we recognize the unconscious, predictable and emotional responses that we react to when exposed to those products or when they come to mind. Ask any child to draw something about McDonald’s and 99% of the time the picture will include a golden arch or pictures toys they receive in their Kid’s Meals. Many adults find they can hardly function without their daily quick fix of Timmies coffee to begin their day; Ferrari initiates a response of adrenaline due to speed & style, and a bottle of Cristal might cause excitement in anticipation of a good time.
But why are brands even important?
A lot of investors overlook the importance of brands because to most people they’re simply a name, label or logo that people associate with a good or bad company. The main problem for an investor is that you can’t easily place a price per share of value that a brand creates for a company based solely on consumer sentiment. If someone did develop a strategy to evaluating a company for an associated premium or discount, it would be extremely difficult and speculative in doing so.
My own approach has been to take into consideration the impact branding has on a business’s ability to succeed in the future based on their brand(s) when I analyze the company. I’ve found that it’s quite simple to make assumptions on future growth, stability and fundamentals of the company once that concept is included in your analysis and you understand the prospects of those products or services. Brands offer an extremely predictive look into the behaviour of large corporations because beyond shareholder value, day to day operations and profitability…any CEO with half a mind knows his/her job rests on the value of the brand their company is associated with.
To put into context what I mean:
On May 6th of this year, I speculated on an online forum that BMO’s exposure to natural gas trading was larger than they had initially reported based solely on the absence of brand protection behaviour when the news was made public to financial markets.
In any normal situation, a public relations blitz is scheduled with qualified top-level management & public relations staff making themselves available to the public & media in the hopes of performing damage control tactics. The mindset in moments like that is to protect the image of the brand at all costs. Promises are made, action is ordered with authority and often the deniability of those involved is kept away from the public’s eyes.
But two weeks into the debacle of the gas trading losses…not a single person had been made available except for written statements to the media; an essential gag order. No one had made a single public appearance to assure shareholders or current customers that their investments were protected from future losses. With a company so tight lipped and applying my own experience with knowledge of brands I came to the conclusion that:
A.) Corporate leaders of BMO didn’t care about their brand image and the impact the news had upon it (not likely)
B.) There was more bad news of trades to come and the public relations package for damage control was prepared for when that was made public (most likely).
Soon after, BMO reported additional exposure to gas trading losses and the company aggressively began their PR campaign in the hopes of recovering their image as a conservative Canadian financial institution. The lesson here is that the importance placed on branding by large corporations can help at times to predict the behaviour of a company. Management often knows that without the brand name, image or logo on their products or services the premium paid by consumers will vanish and along with it the profitability of selling at a higher margin over their competition.
You protect your brand at all costs. Without it you are just another company that a consumer views as not creating any value and not worth the time or effort for acknowledging any comparison to your competition. A brand is the lifeline of a company when things turn bad and one of the best barriers to protect your business future when things go bad.