A Portfolio of Iconic Brands
Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Brands are part of lives. We eat them. We drink them. We ride them. We experience them.
They are everywhere. Whether it is McDonald’s Golden Arches, Nike’s Swoosh, Starbucks’ Coffee, Target’s Bulls-Eye, Altria’s Marlboro Man, or Playboy’s Bunny, we recognize iconic brands in an instant.
We immediately recognize iconic brands because iconic brands have risen above their product and service categories and have become part of our culture. In other words, iconic brands have developed a status that transcends the functional benefits of their products.
We have an emotional bond with iconic brands. They tap into our desires and our fears. They understand our pain and our needs. They create tension and then allow us to relieve anxiety. They provide us with emotional benefits that make us feel good about ourselves.
So What Iconic Brands Did I Select?
What is not to like about Apple give its current price point? With shares hovering near their 52-week lows, it looks like a nice time to consider purchasing Apple. Apple has $137 billion in cash, which translates to approximately $144 per share. So if you factor that into the equation, you are only really paying around $300 per each share of Apple. Furthermore, some bullish analysts believe that Apple is poised to continue to grow its revenue and profits.
On the other hand, some analysts are concerned about Apple’s gross margins, its ability to sustain its earnings per share, and its supply chain constraints. Naysayers are also question whether or not Apple will be able to continue to innovate and deliver new products or whether it will cede its leadership position. They question whether or not Apple will deliver anything other than line extensions in the near future and whether or not future product iterations will generate enough excitement to significantly improve profitability.
At this point in time, I feel that Apple is oversold and an attractive entry point exists. Although I don’t expect anything more than a modest amount of growth and I don’t see a blockbuster new product on the horizon, at under $440 a share Apple looks attractive, especially to those investors like me who missed Apple’s run from $80 a share in 2009 to over $700 a share.
A stock that Warren Buffett loves is Coke. He believes that this company has a moat – not because of its product but because of its brand. According to Warren Buffett, “If you gave me $100 billion and said take away the soft drink leadership in the world from Coke, I’d give it back to you and say it can’t be done.” On the positive side, Coca Cola has an iconic brand, category leadership, a strong cash flow and balance sheet, and exposure to emerging markets. On the negative side, growth is slowing in key markets, margins are deteriorating, and Coca Cola is exposed to currency and commodity price risk that could have a material impact on its profitability. On balance, Coke is a solid safety stock that should continue to deliver solid returns over the long run. Coke has, for example, raised dividends in each of the past 49 years. You might, however, consider waiting for a slightly more attractive entry point given that Coke is currently trading at more than 19 times earnings.
Harley-Davidson has a loyal brand community which it sustains through clubs, events, and a museum. Licensing of the company’s brand and logo, for instance, accounts for a modest yet meaningful percentage of the company’s net revenue. On one hand, Harley-Davidson is trading at a forward P/E ratio of around 13, recently raised its dividend to 21 cents, and recently optimized its new manufacturing platform at its York, PA plant, which should lower manufacturing costs. Moreover, with approximately a 60% share of the U.S. motorcycle market, Harley-Davidson has a dominant competitive position.
On the other hand, this company has a beta of more than 2, which means that, on average, its share price goes up by more than 2% when the market goes up by 1% and down by more than 2% when the market goes down by 1%. In addition to being very sensitive to economic conditions, which can limit discretionary income, this company also faces volatile input and manufacturing costs.
Overall, I love the company and the brand – just not the current share price. That is why instead of purchasing shares right now, I suggest first trying to get a better read on whether or not the company’s cost structure has dramatically improved and whether or not the sales environment will continue to improve (shipment data) and/or waiting for a pullback.
A few months ago, Nike completed a 2 for 1 stock split and raised its dividend. On the positive side, Nike has a strong balance sheet and a decent amount of cash, Nike’s sales have temporarily benefited from its sponsorship of the Summer Olympics and European Soccer championship this year, and Nike is consistently rated as one of the most innovative companies. On the downside, Nike faces weakness in China, increased labor costs, and declining margins. On balance, Nike dominates the very competitive markets that it competes in, is fairly valued, and should perform roughly in line with the market. In other words, given the current price of Nike’s shares I only see the potential for a 5 – 10% upside over the next 12 months. Over the long term, however, Nike will consistently deliver results.
Target is the second largest discount retailer (Wal-Mart is the largest). But Target is the best in the business at providing a pleasant shopping experience. Target has a clean store policy, it offers stylish products at reasonable prices and its stores are very inviting. A little over a month ago, I wrote an article, Target: A Company That Hits the Bull’s-Eye. That article explains what I love about Target’s business model, namely Target’s superior understanding of the customer, its best in class branding, its ability to use data to customize offerings and personalize the experience, and its differentiation from other retailers such as Wal-Mart and Costco. The major concern that I have with Target is that a large portion of Target’s sales (almost half) are from electronics and home furnishings, which could make the company somewhat vulnerable in a poor economy. That isn’t too much of a concern, however, because Target’s shares have historically been less volatile than the S&P. Overall, consistent with the title of the article that I previously wrote, I feel that Target hits the Bull’s-Eye and that at as long as Target is selling at a P/E ratio of less than 14 and below the average of the S&P, Target gets my vote.
My Foolish Take
All of these companies are great companies. In addition to having strong brands, all of these companies are also surprisingly very innovative. In the March 2013 issue of Fast Company, for instance, they wrote an article, The World’s 50 Most Innovative Companies where they ranked Nike #1, Target #10, and Apple #13. Although these are all phenomenal companies, price matters and at their current price points the only company that looks attractive is Apple. The other companies are not all that unattractive. They just need a pullback in the 5 – 10% range to make them look more attractive.
RyanPeckyno has no position in any stocks mentioned. The Motley Fool recommends Apple, Coca-Cola, and Nike. The Motley Fool owns shares of Apple and Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!