It's hard to overestimate the benefit to any business of building and maintaining a strong brand. But doing so hardly guarantees the market will consistently recognize the true equity value of that business. For investors, however, one of the most crucial aspects to achieving market-beating returns is recognizing this disconnect between the price and value of any given stock.
So we asked three of our contributors for big-brand stocks the market has mis-priced. Here's why they believe Wal-Mart , Under Armour , and Apple each fit the bill:
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Steve Symington(Under Armour):Similar to Wal-Mart, the market drove Under Armour stock down in a big way last week after the athletic apparel specialist released third-quarter results. ButunlikeWal-Mart, this happened despite the fact Under Armoureasily beat the market's estimates on both revenue and earningsandraised its full-year guidance.
Yes, I'm aware Under Armour stocklooksexpensive at first glance, with shares trading around 96 times trailing-12-month earnings and 69 times next year's estimates. And investors were understandably concerned that Under Armour's margins saw pressure during the quarter. Gross margin fell to 48.8% from 49.6% in the same year-ago period, hurt by a combination of sales mix and foreign exchange as the influence of its young international business continues to grow. Operating margin also fell from 15.6% to 14.2%, as sales, general, and administrative expenses rose to 34.6% of total revenue, up from 34% in last year's third quarter.
But more than anything, these are short-term consequences of Under Armour's burgeoning business as it continues to invest heavily for growth. Remember, Under Armour recently set an ambitious -- andentirely achievable-- goal of more than doubling revenue from last year's levels to $7.5 billion by 2018. That's not to say margins will always suffer in favor of chasing that growth. But keeping in mind almost the exact same sequence -- beating expectations, raising guidance, and falling anyway amid a seemingly high valuation -- seems to be a recurring theme for Under Armour stock and one that I've personally taken advantage ofmultipletimesbefore.
I think this dip is no different, and long-term investors would be wise to pull the trigger on the dip.
Tim Green (Wal-Mart): Shares of retailer Wal-Martgot hammered after it announced new guidance earlier this month. The company's plan to raise employee wages, announced earlier this year, is expected to reduce operating income by about $1.5 billion in fiscal 2017, leading to a 6%-12% decline in earnings per share. Wal-Mart expects meaningful earnings growth to return by fiscal 2019.
Shares of Wal-Mart were already down significantly year to date prior to the new guidance, and the stock has now lost about 30% of its value so far this year. The market has reacted as if Wal-Mart is doomed, but I think this decline in the stock price presents an opportunity for investors able to stomach a few years of sluggish results.
Wal-Mart is undertaking these initiatives because the company believes that the long-term benefits of improving the customer experience, driven by better trained and more highly paid employees, is worth the short-term cost.
Wal-Mart's brand has been associated with low prices since the founding of the company, but in recent years it's also been identified with a lackluster shopping experience. Wal-Mart hopes to change that, and it's already making progress, with comparable-store sales returning to growth in its U.S. stores. Wal-Mart is not dying, and while profits will be muted over the next few years, investors buying today are getting a great deal.
Andres Cardenal (Apple): When it comes to brand value in the tech industry, Apple is clearly one of the most powerful names around. In fact, Interbrand, which recently published its global brand value ranking for 2015, recognized Apple as the most valuable brand on the planet for the third consecutive year, with an estimated value of $170.3 billion. Similarly, Apple has been considered the most valuable brand in the Forbes brand ranking for five years in a row, with a calculated value of $145.3 billion.
These rankings and estimations are always subjective to some degree, and they are built on different assumptions. However, there is little disagreement on the fact that consumers are willing to pay a premium for Apple products in comparison to those of the competition, and this is a strong reflection on its brand power and competitive differentiation.
Wall Street analysts are quite concerned about the possibility of decelerating growth in the smartphone industry over the coming quarters, and Apple's valuation is clearly reflecting those worries. The stock trades at a price-to-earnings ratio around 13, a big discount versus an average price-to-earnings ratio of 18 for companies in the S&P 500 index.
It makes sense to expect some kind of slowdown in growth over the middle term. Still, at current prices Apple seems to offer far more upside potential than downside risk for investors.
The article 3 Undervalued Big-Brand Stocks to Buy Today originally appeared on Fool.com.
Andrs Cardenal owns shares of Apple. Steve Symington owns shares of Apple and Under Armour. Timothy Green has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple and Under Armour. 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.
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