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Steven Chen
Steven Chen
Articles (117)  | Author's Website |

Century-Old Brands: Betting on Long-Lived Assets, Pt. 2

More iconic brands from overseas that have weathered the test of time

In this article, we continue our exploration of the brand-driven moat. This episode focuses on the international market, where investors may have the fortune to land on abundant cases of century-old iconic brands, particularly in the UK.

It is worth mentioning again that as with any other rule of thumb in the investing world, the Lindy Effect cannot guarantee alpha returns (or maybe any kind of stock return). But it does help filter out certain risks of failure, thereby providing downside protection to some degree for a portfolio. This is why we are keen on examining the return on capital of those long-lived assets and gauging the width of the economic moat.

Burberry (LSE:BRBY)

In 1856, 21-year-old Thomas Burberry, a former draper's apprentice, opened his store in Hampshire, England and started the Burberry brand. By 1870, the business had pivoted to focusing on the development of outdoor attire. Per the company’s recent filing, the total revenue is now diversified across accessories (38%), women’s clothing (31%), men’s clothing (26%) and children’s clothing (5%).

Per the chart below, Burberry delivered an annual free cash return on assets between 11% and 26% for the past decade.

Hermes International (XPAR:RMS)

France-based Hermes International was started by Thierry Hermes in 1837 and quickly developed into one of the top names in the luxury leather industry. Today, the leather goods and saddlery business contributes to roughly half of the total sales at the company.

According to the chart below, Hermes delivered an annual free cash return on assets between 6% and 20% over the last decade.

Vimto by Nichols (LSE:NICL)

Noel Nichols created Vimto in 1908 at his small, wholesale druggist and herbalist business in Manchester, UK. Today, the iconic British drink is sold in over 85 countries in a variety of formats and has even become a Ramadan tradition in the Muslim world. The brand is now contributing to the majority sales of its parent company, Nichols PLC.

As displayed below, the company generated a free cash return on assets between 9% and 25% during the last ten years.

Irn-Bru by A.G. Barr (LSE:BAG)

Famed as the "other national drink" next to whiskey, Irn-Bru was first launched in Scotland in 1901. The ginger-hued drink was then introduced by the name of Iron Brew, while new food labeling regulations later on required brand names to be “literally true,” and hence the change to Irn-Bru (as the product was not actually “brewed”). Today, Irn-Bru is still seen by many as part of the culture of the Scottish Nation. What is more important is that only three persons in the world know the coveted secret recipe, making the brand a priceless asset for its owner, A.G. Barr. The business at A.G. Barr is also a century-old one, operating a diverse portfolio of branded soft drinks, both across the UK and internationally.

As shown in the chart below, the company generated an annual free cash return on assets between 0% and 13% over the last decade.

Johnnie Walker, Smirnoff, Baileys and Guinness by Diageo (NYSE:DEO) (LSE:DGE)

What is the commonality among Johnnie Walker, Smirnoff, and Guinness, except being owned by the same UK-based company, Diageo? These brands have all been living in this world for more than 100 years. Johnnie Walker and Smirnoff were born in the 1800s, and Guinness can trace its origins back to St. James’ Gate Brewery, founded in 1759, one of the world’s oldest breweries. Today, their parent company distributes a total portfolio of over 200 branded products to 180 markets from more than 150 production sites worldwide.

For the past decade, Diageo managed to generate an annual free cash return on assets between 5% and 10% (see below).

Marlboro by Philip Morris (NYSE:PM)

Marlboro started long back in 1847 in England as the first cigarette brand marketed to women. At that time, its manufacturer, Philip Morris, stressed that the Marlboro cigarettes were mild, and hence they do not cause any health issues. The new brand was not successful at first, until the company decided to change its strategy and introduce the cigarettes for the male customer base. Today, Marlboro claims to be the best-selling international cigarette, accounting for roughly one-third of the total cigarette shipment volume at Philip Morris.

As you can see below, the company delivered a free cash return on assets between 17% and 27% over the last ten years.

Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the financial market. We own shares of Hermes, Philip Morris and Nichols.

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About the author:

Steven Chen
Steven CHEN is a quality-focused investor (with bottom-up opportunistic approaches), an ex-hedge fund analyst on Wall Street, a serial entrepreneur, computer scientist, and free-market capitalist.

Steven is the Managing Partner of Urbem Partnership, a value/quality-focused investment partnership fund (www.urbem.capital), and Urbem Capital, the research boutique that focuses on the highest-quality 0.1% of all public companies worldwide.

Steven can be reached at [email protected] or through LinkedIn.

Visit Steven Chen's Website


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