Brand Value vs. Book Value

The brand name "Harley-Davidson" (NYSE: HOG) has a market value of $7,718 million according to the 2007 Interbrand report. Yet, in its 2006 financial statement the company reported the value of intangible assets is just $59 million. Let's see, that means the name value is 131 times greater than the book value.

What's going on here?  In her article in the Sunday Times Denise Caruso, executive director of the Hybrid Vigor Institute, had this to say about valuing corporate assets:

TODAY’S sophisticated knowledge economy is stuck with the equivalent of an abacus for measuring the actual financial value of corporate assets and liabilities. At issue is a growing collection of crucial resources known as intangibles: assets or liabilities that have no obvious physical presence, but that represent real value or vulnerabilities. Patents, trademarks, copyrights and brand recognition are most commonly recognized as intangibles.

To drive home her point, the value of Harley-Davidson's corporate brand is 40% greater than the value of the company's total assets of $5,532! And it accounts for 42% of the company's market cap of $18.2 billion. What does Interbrand know that HOG's accountants don't know: the power of a brand name.

BusinessWeek chose Interbrand's methodology because it evaluates brand value in the same way any other corporate asset is valued—on the basis of how much it is likely to earn for the company in the future. Interbrand uses a combination of analysts' projections, company financial documents, and its own qualitative and quantitative analysis to arrive at a net present value of those earnings.

This is the 4th in my series of posts on brands. The first, "Sears Brand Bonds," was followed by "Coca-Cola's Brand Bonds." And last week I posted an article on "Southwest Airlines: Put a Little LUV in Your Logo! " In this post I compare the book value of intangible assets with the market value that Interbrand places on 49 of the top 100 global brands. The approach is based in part on an analysis of intangible market value in my book Competing for Customers and Capital.

SOME BALANCE SHEETS COLLIDE WITH REALITY
Few of Interbrand's top 100 companies undervalue intangible assets to the extent that Harley-Davidson did. But it's not alone in the stratosphere of intangible miss-valuations. Tiffany & Company (NYSE: TIF) is in the same orbit with a brand value to book value ratio of 130. Interbrand's valuation of Tiffany's is $4,003 million with a balance sheet intangible value of just $31 million. Not far behind is Gap's (NYSE: GPS) ratio of 114 which is based on a brand value of $5,481 versus a book value of $48 million.

Only 49 of Interbrand's top 100 best brands reported the data necessary for this analysis based on S&P's COMPUTSTAT database in 2006 downloaded from Wharton Research Data Services. The most important cause of missing data was due to foreign companies not listing on U.S. stock exchanges. And most offshore financial accounting regulations do not require (or do not recognize) "intangible assets" at all.

Consider the top 28 most valuable brands that reported intangible assets on their balance sheets, where these assets were less than half their Interbrand value. If you add up the Interbrand valuations ($475.5 billion) and compared them with their balance sheet value of intangibles ($65.9 billion) you get a miss-valuation ratio of 7.2 times.

SOME BALANCE SHEETS FLIRT WITH REALITY
To be fair to the accountants for companies that own 14 brands in the top 100 most valuable brands have book values that are "pretty close" to Interbrand's valuations. My measure of "pretty close" is that Interbrand valuations are no more than double the balance sheet values and these in turn are no more than double the Interbrand values. On the high end of this range is Kellogg (NYSE: K) with intangibles valued at $4,868 million on its 2006 balance sheet with an Interbrand value of $9,341 million. On the lower end is Citigroup (NYSE: C) with an intangible asset value of $49,316 million compared with an Interbrand value of $23,443.

The combined book value of intangibles reported by these 14 companies is $200.9 billion. Their combined Interbrand value is $192.7 billion. The brand to book value ratio is about one. To view the data on which this post is based Download the_power_of_a_name.xls

WHAT DRIVES INTANGIBLE VALUE?
For a preliminary answer to this question see my post on "Intangible Value Drivers." If you really want to know how enterprise marketing expenses drive intangible market value, and in turn add to (or diminish) shareholder wealth, read my book Competing for Customers and Capital. Then tell me what you think.

Thank you for viewing.

~V

Comments

[Victor Cook, Jr., New Orleans, Louisiana]

Jonathan,

Thanks for sharing your thoughts on brand value vs book value. I already took your suggestion into account in my latest post of "Brand Value and Market Capitalization." But one thing I didn't mention is the difference between your finding that Interbrand Values represented around 25% of the market cap of the companies in the aggregate. The range was the same, from 2% to 75%, with luxury goods at the top, but oil companies were no longer included.

What accounts for the difference between the 25% you found and the 17% in the 2006 data? Part of it could be the fact that I included only 49 of the 100 top brands. But looking over the list those 49 were spread evenly among the ranks from # 1 (KO) to # 100 (HTZ). So the distribution probably is not a factor.

Is the 8% difference statically significant? Certainly not, since the standard deviation in my sample was 17%. Your census result would have had a smaller sigma, even given the same range, since the sample was twice a large. But even if sigma were half, the 8% wouldn't be statistically significant. The dollar amounts, however, would be very significant from a practical point of view.

What are you thoughts on this?

~V

[Jonathan Knowles]

Hi Victor
I think the whole discipline of relating brand value to some financial metric is laudable - but I think you have chosen the wrong metric. As you know, the accounting regulations only allow for ACQUIRED intangibles to be shown on the balance sheet. The companies with the most disclosed intangibles are therefore those that have done the most - or the largest - acquisitions involving a significant amount of goodwill. It is no surprise that the acquisitive Citi has a low ratio and the non-acquisitive Harley has a stratospherically high one.
Comparing overall brand value to disclosed intangibles is therefore a false comparison (at the end of 2005, the 5,000 largest public companies in the world had an aggregate enterprise value of $36 trillion of which $14 trillion was tangible net assets but only $4 trillion was disclosed intangibles). The more meaningful question is to analyze what proportion of overall value (and of intangible value) is represented by brands.
I am delighted that this is what you are working on now! When I last looked at this, I think I found that the Interbrand brand values represented around 25% of the market capitalization of the companies in aggregate but ranged from a low of 2% for the oil majors to a high of over 70% for the luxury goods companies.