Brand name valuation (also part of sales multiples)
- 1. Aswath Damodaran 161 Value/Sales Ratio: An Example n Consider, for example, the Value/Sales ratio of Coca Cola. The company had the following characteristics: After-tax Operating Margin =18.56% Sales/BV of Capital = 1.67 Return on Capital = 1.67* 18.56% = 31.02% Reinvestment Rate= 65.00% in high growth; 20% in stable growth; Expected Growth = 31.02% * 0.65 =20.16% (Stable Growth Rate=6%) Length of High Growth Period = 10 years Cost of Equity =12.33% E/(D+E) = 97.65% After-tax Cost of Debt = 4.16% D/(D+E) 2.35% Cost of Capital= 12.33% (.9765)+4.16% (.0235) = 12.13% Value of Firm0 Sales0 =.1856* (1-.65)(1.2016)* 1 (1.2016) 10 (1.1213)10 錚 錚 錚 錚 錚 錚 .1213-.2016 + (1-.20)(1.2016)10 * (1.06) (.1213-.06)(1.1213)10 錚 錚 錚 錚 錚 錚 錚 錚 錚 錚 錚 錚 = 6.10
- 2. Aswath Damodaran 162 Value Sales Ratios and Operating Margins Coca Cola: The Operating Margin Effect 0 2 4 6 8 10 12 6% 8% 10% 12% 14% 16% 18% 20% Operating Margin Value/SalesRatio 0 50 100 150 200 250 $Value Value/Sales $ Value
- 3. Aswath Damodaran 163 MSEL GDYS RET.TO MLG MHCO ZANYPSRC FINLROSIFLWS LVC TWMCSPGLA SAH RUSH MDADBRNGADZ WLSNCELL FNLYJILL IBICLWYANIC VOXX CHRS PSS BKEZMTMC HMYPBY URBN ROST AEOSPGDACC BEBEITN CAOGBIZ DAP RUS MNRO SCHS HLYWMENSLE LIN MDLK RAYS PIR GLBEZQK MIKECWTR IPAR ANNAZONSITBBY LTD ZLCORLY FOSL PSUN CLEPLCEJWLSATH PCCC WSM TLB HOTT CPWM TWTR SCC BFCI TOOVVTV MBAY BIDDABR ISEE CHCS CDWC LUX -0.0 0.5 1.0 1.5 2.0 -0.000 0.075 0.150 0.225 Operating Margin V / S a l e s U.S. Specialty Retailers: V/S vs Operating Margin
- 4. Aswath Damodaran 164 Brand Name Premiums in Valuation n You have been hired to value Coca Cola for an analyst reports and you have valued the firm at 6.10 times revenues, using the model described in the last few pages. Another analyst is arguing that there should be a premium added on to reflect the value of the brand name. Do you agree? o Yes o No n Explain.
- 5. Aswath Damodaran 165 The value of a brand name n One of the critiques of traditional valuation is that is fails to consider the value of brand names and other intangibles. n The approaches used by analysts to value brand names are often ad- hoc and may significantly overstate or understate their value. n One of the benefits of having a well-known and respected brand name is that firms can charge higher prices for the same products, leading to higher profit margins and hence to higher price-sales ratios and firm value. The larger the price premium that a firm can charge, the greater is the value of the brand name. n In general, the value of a brand name can be written as: Value of brand name ={(V/S)b-(V/S)g }* Sales (V/S)b = Value of Firm/Sales ratio with the benefit of the brand name (V/S)g = Value of Firm/Sales ratio of the firm with the generic product
- 6. Aswath Damodaran 166 Illustration: Valuing a brand name: Coca Cola Coca Cola Generic Cola Company AT Operating Margin 18.56% 7.50% Sales/BV of Capital 1.67 1.67 ROC 31.02% 12.53% Reinvestment Rate 65.00% (19.35%) 65.00% (47.90%) Expected Growth 20.16% 8.15% Length 10 years 10 yea Cost of Equity 12.33% 12.33% E/(D+E) 97.65% 97.65% AT Cost of Debt 4.16% 4.16% D/(D+E) 2.35% 2.35% Cost of Capital 12.13% 12.13% Value/Sales Ratio 6.10 0.69
- 7. Aswath Damodaran 167 Value of Coca Colas Brand Name n Value of Cokes Brand Name = ( 6.10 - 0.69) ($18,868 million) = $102 billion n Value of Coke as a company = 6.10 ($18,546 million) = $ 115 Billion n Approximately 88.69% of the value of the company can be traced to brand name value