All seasoned value investors know that calculating intrinsic value is more art than science. I am certainly far from perfecting the art of calculating reasonable intrinsic value of an organization. But I do try to keep an eye open for data that leads to it.
Interbrand recently published the "Best Global Brands" list for 2009. It is an interesting list to view as a value investor because they also rank their estimate of the value of the brand of the organization.
Let me pick on one business in the list that jumps at me. The name of the business Harley Davidson (NYSE:HOG). Assuming that their calculation is correct-- and this may be a bit of a stretch; they mark the value of Harley's brand to be $4.337B. As of market closing today, the market valued the entire business at $5.7B. So, this would mean that the brand value represents approximately 76% of the value of the entire business!
This is rather absurd.
I understand that the brand means a lot to Harley, so it isn't surprising that it would represent a large percentage of the entire value of the business. 76% is a substantial percentage, and this points to a possible market misjudgement.
Either the market valuation is too low or the value of the brand is substantially lower than what Interbrand claims. I suspect that the former to be more true. Please note that according to Interbrand, Harley's brand value has fallen 43% in 2009.
Based on a crude, back of the envelope calculations, it appears that Harley's book value should be about $4.2B higher (their goodwill amount is a mere $114M). That would raise the book value from $2.25B (as of June 2009) to $6.45B. Assuming that market still values Harley at the current Price to Book ratio of 2.53 (5.7B/2.25B), the market value should be about $16.34B or $69.82 per share. That valuation represents a margin of safety of about 65%.
Disclosure: I own Harley Davidson at the time of this writing.
