What's in a name?
For many companies, a name can be everything. Some brand names are so beloved that consumers will gravitate toward a brand's products practically without thinking of the alternatives. That's a serious competitive advantage for a company, and one that can be worth billions of dollars.
Investors looking to capitalize on the competitive advantages afforded by a big brand would do well to look into these three stocks.
The most magical place on Earth
Walt Disney (DIS 0.84%) is a media conglomerate that houses several popular brands. There's its flagship brand, Disney, which includes its film studio, cable television channel, theme parks, and consumer goods. It also owns ESPN -- "The Worldwide Leader in Sports" -- which is the driving force behind its media networks. Oh, and it owns Pixar, Marvel, Star Wars, ABC, and 30% of Hulu -- all big brands in and of themselves.
Disney's brands give the company exceptional pricing power. ESPN, for example, charges the highest carriage fees of any cable network by far. If you and the family want to spend a couple days at Disney World, you can easily spend around $1,000.
Disney is able to monetize its popular characters through box-office sales, its theme parks, and consumer goods. It makes new experiences at its theme parks, new films based on old characters, and a continual stream of new toys. It also licenses its brands and intellectual property like Marvel to other content creators.
Disney is about to make the next step in leveraging its strong brands. It's going to offer direct-to-consumer streaming video services for both its ESPN brand and its Disney brand. Disney's strong brand and content library should make the Disney platform a success, and the ESPN platform should shore up the declining subscriber base of its cable networks.
Finally, Disney's brand could get even stronger with the acquisition of Twenty-First Century Fox's (FOXA) film and television properties. Fox is a strong brand itself, and the acquisition should add considerable pricing power in Disney's media networks segment while bringing even more new characters to its theme parks.
Continued box office dominance, a parks business that keeps raking in visitors, and a strong presence in every cable package make Disney stock a buy.
The coffeehouse on every corner
Starbucks' (SBUX 0.18%) brand is not only one of the most recognized in coffee, but in all of the restaurant industry. Besides Starbucks Coffee, Starbucks also owns Tazo Tea and Teavana. Starbucks is in the process of closing its Teavana stores, but the brand will continue to live on in Starbucks stores and in grocery aisles.
Starbucks' started fiscal 2018 with worse-than-expected earnings. Its same-store sales grew just 2% last quarter, while management was guiding for growth of 3% to 5% for the year. And guidance for "soft" comparable sales in the second quarter means that it'll be lucky to reach the bottom end of that range.
As a result of the weak earnings, Starbucks shares pulled back. That may present a buying opportunity for investors interested in the strong brand.
The poor results are not a reflection of any problems with Starbucks' brand. Management attributed the problem with its holiday offers not resonating (as they haven't changed much in several years), a decrease in mall traffic as more people do their holiday shopping online, and pressure on non-Starbucks Rewards members. Management is taking steps to resolve the issues it has control over, including onboarding new Rewards members through a co-branded credit card later this year and opening digital payments to non-Rewards members.
But the big brand story remains in China, where the company is expanding rapidly and taking full advantage of its brand strength. Sales in China increased 30% last quarter, and its comparable-store sales were up 6%, driven entirely by an increase in transactions. The company opened 300 new stores in the region, bringing its total to 7,800. What's more, management expects the acquisition of East China, which brought 3,100 Starbucks stores under corporate's control, will accelerate growth in the region going forward.
With the tremendous growth potential in China and slight improvements coming in U.S. operations, Starbucks shares could be a great opportunity for investors right now.
Shaving its brand portfolio
Procter & Gamble (PG -0.92%) has shed the majority of its brands in recent years, dropping from 170 in 2014 to 65 today. Still, it's the owner of familiar household names like Gillette, Pampers, Head & Shoulders, and Tide.
While capital appreciation has been practically nonexistent as it shed those brands, the company is now poised to benefit from greater focus on its higher-return brands. Management reported 3% sales growth during the second quarter of fiscal 2018, indicating the efforts to drive greater sales from a smaller brand portfolio are starting to pay off. The company can now focus its marketing efforts on a few select products.
That said, Procter & Gamble is still facing an ultra-competitive environment. Its brand strength should support modest sales increases, and the introduction of higher-margin premium products from its most popular brands like Tide should help improve gross margin.
P&G should be able to drive profitable growth through continued cost-cutting efforts. Management expects to extract another $10 billion in efficiencies through reduced overhead, lower cost of goods sold, and marketing efficiencies. The strength of its brands is key to those last two points, as they allow the company to benefit from increased scale. The addition of activist investor Nelson Peltz to the board of directors should ensure management stays on course in its efforts to improve profitability, but I don't think it necessarily means we'll see a significant change in the company's current strategy.
P&G is a much more conservative investment, representing a noncyclical consumer goods company. The fact that it's lagged the market in recent years as other companies have boomed is no surprise, but when the next economic downturn hits, P&G is poised to outperform, held up by the strength of its brands. In the meantime, the stock pays out a very nice dividend, yielding about 3.1% with annual raises from management.
Big brands worth buying
It's worth noting that none of these three big-brand companies are without faults: Disney's media networks are losing subscribers, Starbucks' stores in the U.S. aren't growing sales as quickly as anticipated, and P&G is losing market share. But those problems are what make them great buys today, because the brand strength of each of these companies should help them overcome those problems.