In late May, Ferrari (NYSE:RACE), arguably the most famous car brand in the world, unveiled its electric vehicle, the Luce.
Designed by creative powerhouses Johnny Ive and Marc Newsom, designers of iconic products including the iPhone and Apple Watch, respectively. The Luce was meant to be Ferrari’s pièce de résistance for the growing electric vehicle market.
But the reaction wasn’t one of awe and excitement.
“That’s not a Ferrari” they chortled.
On financial markets, the share price of Ferrari fell 8% in Italy and 5% in New York. However, its share price has since recovered from the initial (over?) reaction.
What made motor enthusiasts throw their oil-stained rags away in disgust? It goes to the heart of what a brand is and why it is such a valuable asset, even if it never appears on a company’s balance sheet.
It’s also a lesson in why much of the market still doesn’t quite understand how to think about brands, especially if you invest for the long term.
But first…
What happened in markets this week?
Here’s a quick summary of some of the main news from the past week:
🛢️ Oil jumps as US strikes against Iran risk unravelling Mideast truce (CNBC)
- What happened: Oil prices have jumped following US missile strikes against Iran in retaliation for alleged attacks on commercial vessels in the Strait of Hormuz, where around 20% of global oil supply needs to pass through.
- How it impacts investors: Higher oil prices lead to increased costs for companies, which then lead to higher prices being charged to consumers, leading to the risk of higher inflation and increasing interest rates.
- Next Steps: Check out the US Midstream Oil and Gas Pipeline Operators Screener to find what oil companies exist and whether there are any opportunities.
🤖 Semiconductor worker shortfall endangers US chip factory revival (Bloomberg)
- What happened: A nationwide shortage of high-skilled workers threatens to delay construction of new semiconductor plants and constrain future chip production.
- How it impacts investors: With hundreds of billions of dollars being invested in new semiconductor plants across the US, a shortage of skilled workers could cause significant delays to the growth plans of companies like Taiwan Semiconductor, Micron Technology, Samsung and Intel.
- Next Steps: Use the Chipmakers Outside Taiwan Watchlist to identify popular semiconductor compani es (including those in the US) to trace potential impacts back to some of the most powerful names in the industry.
🚘 Rivian’s shares fall after public offering plan overshadows upbeat revenue forecast (Reuters)
- What happened: Shares in electric vehicle manufacturer Rivian fell 9% after the company announced a capital raising to help fund contributions as part of a loan agreement with the US Department of Energy.
- How it impacts investors: Capital raisings can be done for many different reasons, but can dilute the holdings of investing investors. The market took a negative view of Rivian’s announcement, even though revenue forecasts remain above analyst estimates.
- Next Steps: Head on over to Rivians’ company profile and add your narrative or read from other investors.
💲 Fed minutes: Officials deeply divided over future path of US inflation (Associated Press)
- What happened: Recently released minutes from the US Federal Reserve show that the committee that sets the direction of US interest rates are split on where they believe inflation is headed over the remainder of the year. In fact, some members were said to be of the view that rate hikes, rather than cuts, may be required.
- How it impacts investors: Interest rates are an important metric in regard to the valuation of assets. In general, when interest rates rise, asset prices fall, and when interest rates fall, asset prices rise. Markets also hate uncertainty, so the news of a split Federal Reserve could lead to volatility.
- Next Steps: Use our Portfolio tool to analyse your holdings, projected income, and portfolio-level financial health amid potential volatility.
💻 Tech volatility hits highest since dot-com bust next to S&P 500 (Fortune)
- What happened: An index that tracks implied volatility in the technology-heavy NASDAQ 100 has reached its highest level since the dot-com bubble of the early 2000s.
- How it impacts investors: The CBOE NDX Volatility Index reaching highs not seen since the dot-com bubble could be interpreted as an expectation that the market is expecting further volatility in the future, and specifically in the tech sector, which has seen significant increases in share prices as the market embraces artificial intelligence.
- Next Steps: Explore our High Growth Tech & AI investing ideas to discover companies benefiting from the AI infrastructure buildout.
📱 Samsung profits jump 1,800% as AI chip demand soars (BBC)
- What happened: Strong demand for AI-memory chips has led electronics powerhouse, Samsung Electronics, to announce that it expects operating profit to grow by 1,800% in the year. However, this news wasn’t enough to stop its share price from falling 7% on the news.
- How it impacts investors: Samsung’s earnings point to two core story lines. The first is the continued strong growth in demand for artificial intelligence and ancillary technology. The other story is how the market appears to be taking a more cautious view of AI companies after the sector has seen enormous exuberance from investors.
- Next Steps: Review Samsung’s fundamentals and future growth expectations.
The anatomy of a durable brand
“What is a brand?”
Ask a random person on the street and you might get answers like “the company’s name”, “it’s logo”, or “how it stands out from its peers on a shelf”.
Using these definitions, every company has a brand. But, as investors are aware, not every company has a brand that matters. So, there must be more to it than that.
A real and valuable enduring brand is far more than a company logo. It is how a product looks, how it feels and works. It is how a company treats its customers. It is the intangible feeling or belief its product instills on its customers. It is the reason why, even if a similar or cheaper option is available, that a customer will refuse to look elsewhere and stay loyal to a company.
The result?
Customers stick around, even during tough times, and the company maintains better pricing power and sustains higher margins than its competitors. It also allows a company to maintain or grow market share. These elements together, when compounded over time can be a powerful driver of a company increasing its valuation and share price over time.
Fads are not fortresses
It can be, however, easy to confuse a brand for marketing spend.
Every year or so, a new company will appear almost out of nowhere and take the world by storm while investors call it the next big thing, only to fizzle and disappear just as quickly as it arrived.
Beyond Meat (NASDAQ:BYND) is the perfect example.
Beyond Meat was one of the pioneers of plant-based meat products that gained popularity on a tide of concerns about sustainability and celebrity endorsements. Investors were just as excited sending its share price up from its US$25.00 price it sold shares for in its IPO to over $200.00 per share in a couple of months.
Today, its share price is around US$0.67 per share.
Part of the investment thesis was that this was a company who could become the Coke or Pepsi in a fast growing market, not just an industry leader, but an enduring and powerful brand.
But all of that was proven hollow very quickly.
COVID locked down the world, including restaurants where most of Beyond Meat’s products were being consumed. Sustainability became less of a concern with people more focussed on survival. New competitors launched similar products and Beyond Meat’s growth slowed and its financial performance struggled. As a result, the company was forced to cut costs which, often, sees marketing take a big hit.
And when a fake brand cuts back on costs, including marketing, the truth comes out and that is that it was perhaps never a brand at all.
Enduring brands endure
Hermes (ENXTPA:RMS) is the opposite of Beyond Meat.
Founded in 1837 to help manufacture horse saddles for the French aristocracy, the company is now one of the biggest names in fashion and leather goods and is famous for a business model that almost forces its customers to prove they are worthy to shop inside its stores.
That is over 100 years of history. More than a century of being known as a symbol of quality and status.
It is an example known as the Lindy Effect.
The Lindy Effect theorises that the longer a non-perishable thing has survived or has been used, the longer it is likely to exist into the future.
Or to use Hermes as an example, the longer it has survived and been known as a symbol of quality and status, the more likely it is going to continue having that reputation. And it’s not just Hermes. Look at the largest luxury companies in the world, and you will find many who have existed for around a century.
But why does this work for brands?
It proves durability.
For a company to not just survive, but thrive for 100-plus years, it has to not only overcome numerous challenges but find a way to come out of it better each time. This includes market and economic crashes, wars, competition, changes in trends… not to mention, technological advancement and changes in management. It won’t always be smooth sailing. There will be bumps, but it will rarely be fatal.
Real enduring brands can’t easily be dislodged or substituted.
A brand by any other name
However, one shouldn’t confuse a well-known name and a long history with a long and enduring brand.
Take Australian mining giant, BHP Group (ASX:BHP).
Like Hermes, it has existed for more than 100 years and is a well-known company in its industry.
But while customers may be willing to pay a high premium for a leather goods emblazoned with a Hermes logo, no customer is paying a premium for a tonne of coal or iron ore with a BHP logo stamped on it.
Does BHP have a brand? Undoubtedly yes. Does it have a brand that matters or is relevant in its industry? I’d argue, no.
That is because mining is not an industry where differentiation is possible. The price of a mineral or resource is set by a global market. If you try to charge a higher price than the market is dictating, customers just go to a competitor. Profit in mining is not driven by price, it’s driven by controlling costs.
This question, “Is a brand relevant for this company or in this industry?”, is a core question investors should ask when analysing a company. If the answer is no, then they shouldn’t pay up for it.
The asset hiding in plain sight
I was once told by an investor “If it is important, it is in the numbers”.
Brands don’t show up in the numbers. You won’t find it in any financial statement, whether it be an income-producing item in the income statement, an asset on the balance sheet or a driver of cash generation.
That can lead some investors to ignore it.
But just because something isn’t explicitly listed doesn’t mean that it isn’t there.
What are the symptoms of an enduring brand that we discussed above? Sustained demand, pricing power and higher profit margins and overall profitability compared to its competitors. These are real, financially important things that drive value.
If a company can earn excess profit, whether that is viewed as higher than average profitability in its industry or an excess return on investment versus its cost of capital, then it will find itself the most valuable company in its industry.
If a company can’t generate stronger financial performance than its peers, then its brand is likely not as important as the company claims (hello car manufacturers).
Brands help companies compound their advantage both in terms of competitive positioning and financial performance over a long period of time and that is something that is likely going to be lucrative for those who buy shares in those companies.
The insight: Spotting enduring brands
So, if brands are important and can be a source of opportunity, how do you spot enduring brands?
The first step is to look at a company’s history.
How long has a company been around? What is the reputation of its products? How do customers react when they get it wrong? What is the company’s philosophy about business?
An enduring brand doesn’t just look to maximise value or profit for shareholders. They often have a real vision and philosophy as to how they go about business and what they want the company or its brand to stand for. A vision that has been built up over a long history of success.
Next, look at whether the company is in an industry where branding matters. In some markets, where differentiation is more important than price, a company with a strong, enduring, brand is likely to outperform its peers. But in those markets where price is the major driver, a brand is likely to have less power in the purchasing decision.
Finally, don’t just take a company’s brand for granted. If a brand is real, you’ll see it in the numbers through higher profitability and more consistent and sustained growth. If a company isn’t doing better than its peers, then perhaps you need to be questioning whether the company’s brand is as valuable as it thinks it is.
Key events next week
Tuesday
- 🇺🇲 Core Inflation Rate
- 📈 Forecast: 2.9%, Previous: 2.9%
- ➡️ Why it matters: The inflation rate is a key signal regarding economic growth and any potential changes in interest rates.
- 🇨🇳 Chinese GDP announcement
- 📉 Forecast: 4.7%, Previous: 5.0%
- ➡️ Why it matters: Provides a snapshot of how much one of the largest economies in the world is growing.
Wednesday
- 🇺🇲 US Producer Price Index (PPI)
- 📉 Forecast: 0.5%, Previous: 1.1%
- ➡️ Why it matters: The PPI provides a snapshot on the inflationary pressures being faced by producers.
Thursday
- 🇺🇲 US Retail Sales
- 📉 Forecast: 0.5%, Previous: 0.9%
- ➡️ Why it matters: Retail sales activity is a key indicator on consumer spending activity.
- 🇬🇧 UK GDP announcement
- 📉 Forecast: 4.7%, Previous: 5.0%
- ➡️ Why it matters: Provides a snapshot of how much one of the largest economies in the world is growing.
Friday
- 🇪🇺 Euro CPI announcement
- 📉 Forecast: 2.8%, Previous: 3.2%
- ➡️ Why it matters: Provides a snapshot of the level of inflation across Europe and plays a part in the setting of interest rates by the European Central Bank.
Some notable companies releasing earnings results in the next week include American banking giants like JP Morgan Chase & Co, Bank of America Corporation, Goldman Sachs, Wells Fargo, Citigroup, Morgan Stanley and Blackrock. As well as ASML Holdings and Taiwan Semiconductor Manufacturing Company, who are key companies in the semiconductor supply chain.
Disclosure
Simply Wall St writer Andrew Legget has positions in ENXTPA:RMS (Hermès). Simply Wall St have no position in any of the companies mentioned. This article is general in nature. Any comments below from SWS employees are their opinions only, should not be taken as financial advice and may not represent the views of Simply Wall St. Unless otherwise advised, SWS employees providing commentary do not own a position in any company mentioned in the article or in their comments. We provide analysis based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
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