Brand Name Valuation
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%
( 1 -.65)(1.2016)* 1
− (1.2016)10
Value of Firm
(1.1213)10
( 1 -.20)(1.2016)10 * (1.06)
0
= .1856*
+
= 6.10
Sales
.1213-.2016
(.1213-.06)(1.1213)10
0
Aswath Damodaran
161
Value Sales Ratios and Operating Margins
Coca Cola: The Operating Margin Effect
12
250
10
200
8
150
Value/Sales
6
$ Value
$ Value
100
Value/Sales Ratio
4
50
2
0
0
6%
8%
10%
12%
14%
16%
18%
20%
Operating Margin
Aswath Damodaran
162
U.S. Specialty Retailers: V/S vs Operating Margin
2.0
CDWC
LUX
CHCS
ISEE
DABR
BID
VVTV
MBAY
TOO
BFCI
SCC
1.5
TWTR
CPWM
HOTT
TLB
PCCC
WSM
SATH
JWL
PLCE
PSUN
CLE
FOSL
V 1.0
/
ZLC
ORLY
S
LTD
NSIT
BBY
a
AZO
MIKE
CWTR
IPAR ANN
l
RAYS
ZQK
PIR
GLBE
e
LE
LIN
MENS
MDLK
s
SCHS
HLYW
MNRO
GBIZ
DAP
RUS
CAO
CC
ITN
BEBE
PGDA
0.5
ROST
AEOS
URBN
MTMC
PBY
Z
HMY
ANIC
VOXX
CHRS
PSS
BKE
CLWY
I B I
CELL
JILL
FNLY
GADZ
DBRN WLSN
SAH
RUSH
MDA
SPGLA
FLWS
ROSI
LVC
TWMC
FINL
PSRC
ZANY
MHCO
GDYS RET.TO
MLG
-0.0
MSEL
-0.000
0.075
0.150
0.225
Operating Margin
Aswath Damodaran
163
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.
Aswath Damodaran
164
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) -(V/S) }* Sales
b
g
(V/S) = Value of Firm/Sales ratio with the benefit of the brand name
b
(V/S)g = Value of Firm/Sales ratio of the firm with the generic product
Aswath Damodaran
165
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
Aswath Damodaran
166
Value of Coca Cola’s Brand Name
n
Value of Coke’s 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
Aswath Damodaran
167
