Brand value vs book value

The “Harley-Davidson” (NYSE:HOG) brand name has a market value of $7,718 million according to the 2007 study. Interbrand report. Yet in its 2006 financial statements, the company reported the value of intangible assets to be only $59 million. Let’s see, that means the name value is 131 times the book value.

What is happening here? In her article at Sunday TimesDenise Caruso, Executive Director of the Hybrid Vigor Institutehad this to say about the valuation of company assets:

TODAY’s sophisticated knowledge economy is stuck with the equivalent of an abacus to measure the true financial value of corporate assets and liabilities. The problem is a growing set of crucial resources known as intangibles: assets or liabilities that have no obvious physical presence, but which represent real value or vulnerabilities. Patents, trademarks, copyrights and brand recognition are most often recognized as intangible assets.

To drive the point home, the value of the Harley-Davidson corporate brand is 40% greater than the value of the company’s total assets of $5,532! And that’s 42% of the company’s market capitalization of $18.2 billion. What Interbrand knows that HOG accountants don’t: the power of a brand name.

BusinessWeek chose Interbrand’s methodology because it assesses the value of the brand in the same way as any other company asset, based on what it is likely to bring to the company at the future. Interbrand uses a combination of analyst projections, company financial records and its own qualitative and quantitative analysis to arrive at a net present value of these earnings.

This is the 4th in my series of articles on brands. The first one, “Sears Brand Bonds“, (NASDAQ: SHLD) was followed by “Coca-Cola’s brand obligations(NYSE:KO). And last week I posted about “Southwest Airlines should put LUV in their logo” (NYSE:LUV). In this article, I compare the book value of intangible assets with the market value Interbrand assigns to 49 of the top 100 global brands. The approach is partly based on an analysis of intangible market value in my book Competition for customers and capital.

Some assessments clash with reality

Few of Interbrand’s 100 largest companies undervalue intangibles as much as Harley-Davidson. But it’s not the only one in the stratosphere of intangible evaluation errors. Tiffany & Company (NYSE:TIF) is in the same orbit with a brand to book value ratio of 130. Tiffany’s valuation by Interbrand is $4,003 million with an intangible on-balance sheet value of just $31 million . Not far behind is the Gap (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 brands provided the data needed for this S&P-based analysis COMPUTSTAT database in 2006 downloaded from Wharton Research Data Services. The most important cause of missing data was due to the fact that foreign companies are not listed on US stock exchanges. And most offshore financial accounting regulations don’t require (or recognize) “intangibles” at all.

Consider the 28 most valuable brands that reported intangible assets on their balance sheets, where those assets accounted for less than half of their inter-brand value. If you add up Interbrand’s valuations ($475.5 billion) and compare them to their balance sheet value of intangible assets ($65.9 billion), you get a misvaluation ratio of 7.2 times .

Some balance sheets flirt with reality

To be fair to accountants, companies that own 14 of the 100 most valuable brands have book values ​​”fairly close” to Interbrand’s valuations. My measure of “close enough” is that Interbrand’s valuations are no more than double balance sheet values ​​and these in turn are no more than double Interbrand’s values. On the high end of that range is Kellogg (NYSE: K) with intangible assets valued at $4,868 million on its 2006 balance sheet with an Interbrand value of $9,341 million. At the bottom of the scale is Citigroup (NYSE:C) with an intangible asset value of $49,316 million, compared to an Interbrand value of $23,443.

The combined book value of intangible assets reported by these 14 companies is $200.9 billion. Their combined Interbrand value is $192.7 billion. The ratio of brand to book value is approximately one. To see the data on which this post is based, see here.

What determines intangible value?

For a preliminary answer to this question, see my post on “Intangible value drivers.” If you really want to know how the company’s marketing spend generates intangible market value and, in turn, increases (or decreases) shareholder wealth, read my book. Competition for customers and capital. So tell me what you think.

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