P/E Ratio
How Brand Impacts Share Price
67% of companies in the S&P 500 may be inaccurately valued due to the misunderstanding of one key business asset.
Complementing a quarter of a century of proprietary brand valuation data with new research, Interbrand demonstrates that 67% of companies in the S&P 500 may be inaccurately valued.
This new finding began with a simple observation: business brand growth and earnings potential aren’t always reflected in a company’s public share price. Individual brands’ price-to-earnings (P/E) ratios are not consistently performing against peers – or are experiencing high volatility, signaling stock may be improperly valued.
A disconnect exists between the companies’ performance and the investment community’s analysis of their brands. However, we haven’t just identified the problem. Through analysis of over 500 companies’ P/E ratio over a five-year average and primary research within the investment community, we’ve identified a powerful driver that can potentially shift the balance, changing investor understanding, and thereby bringing earned value back to a company’s share price. Best of all, it’s an asset that companies already have the power to leverage or strengthen: their brand.
Interbrand, the world’s leading brand consultancy, progressed business valuation by bringing a tangible number to the seemingly intangible asset of brand value, defined by the combination of financial performance, the role of brand in driving choice and brand strength, which measures the ability of the brand in creating demand and reducing risk. What was once an unknown is now a recognized strength, and we are again bringing our new findings to the business world. The investment community of analysts and journalists today sees the influence of brand on valuation, with brand being the second most important consideration to investment analysts and journalists when evaluating a company’s prospects. 76% agree that brand has a meaningful impact on valuation. However, brand understanding amongst this audience is low, with the majority lacking a deep understanding.
When we first recognized that share price was lagging behind growth for many companies, our team of brand economics experts hypothesized that this apparent disconnect could be because the brand itself was not effectively communicated to the investment community.
To investigate and interrogate this hypothesis, Interbrand partnered with B2B market research leader NewtonX and integrated communications agency Brodeur Partners to determine if brand could have a strong connection to share price. The result of our partnership efforts is the basis of this report that connects brand, investor communications and advanced AI-based research.
Clarifying a winning brand strategy to investors can shift the balance on expectation of future brand performance, boosting share price. Perceived brand value can be improved—and Interbrand and our team of powerful partners can help make the leap.
Visualizing the Relationship
After determining this was an area that would benefit from further analysis, the team sought to determine the depth of the disconnect between brand strength and share price. We developed a dataset consisting of U.S. publicly traded S&P 500 companies and the Interbrand Best Global Brands 2023 cohort of the world’s most valuable brands that weren’t already included in the S&P. We then analyzed the P/E ratio of each company over the past five years (2018 – 2023), specifically looking at the absolute level of P/E ratio and the variance of the ratio itself.
Our resulting findings are that 67% of all companies in the dataset are not overperformers—hence implying that either their stock is undervalued, or the share price is more volatile than its underlying performance. Through this analysis, we were able to place company outcomes in four distinct categories:
01
Consistent Overperformer
A company that has a higher average P/E ratio than its sector competitors and less volatile than its sector average.
02
Consistent Underperformer
A company that has a lower average P/E ratio than its sector competitors and less volatile than its sector.
03
Inconsistent Overperformer
A company that has a higher average P/E ratio than its sector competitors and more volatile than its sector.
04
Inconsistent Underperformer
A company that has a lower average P/E ratio than its sector competitors and more volatile than its sector.
Brand and Valuation in Context
The following quadrant charts comparing P/E average to variance served as important tools as we sought to understand the comparative relationship of the brands within our dataset in relation to others in their sector. We divided brands into 51 sectors, based on the Best Global Brands methodology and Yahoo Finance sector definitions.
To demonstrate the four ways a company could be categorized based on its P/E ratio and volatility relative to other companies in its sector, we assessed companies in the technology, medical device and finance sectors to show how the research and analysis may lead to stock value increases through better brand communication and understanding.
Data on all sectors is available upon request.
Technology
Highly Valued, but Undervalued
In the tech sector, we see consistent performance among the top companies. However, the results are often due more to the product market fit that the company achieved rather than its brand. A notable example of this performance through scale is Oracle. For many years, Interbrand ranked Oracle as a Best Global Brand, yet Oracle left the ranking because it was too product-centric and brand performance fell below the requirements. During those few years, Oracle reworked its customer, partnership and product strategies to become customer-centric. It accomplished this not only by reorganizing internally, but also by opening its doors to a broader ecosystem of partnerships. Its success is now recognized, and Oracle has returned to the Best Global Brands ranking, but clearer and earlier communication of the transition may have helped Oracle enjoy a higher share price for longer. Not surprisingly, Apple has been undervalued relative to its peers over the past five years, as it has repeatedly surpassed earnings expectations. Current analysis focuses too much on individual product or service performance (iPhone sales in China most recently) rather than the resilient power of its brand ecosystem, which continues to deliver earnings.
Medical Device
Brand Matters for B2B Businesses
Below is a representative set of companies from the medical device sector. The analysis of these companies show how brands are undervalued. In this sector, two levers tend to cause inaccurate valuations: earnings calls and domestic news. When reviewing the earnings calls of these brands, leadership of the companies fail to include their brand strategy and how it might impact their revenue and earnings. This oversight is likely a cause for Henry Schein to be undervalued. Its earnings have recovered well from Covid disruptions, but analysts seemingly underestimated the pace of recovery for its strong brand. Combine missing brand information and domestic news and brands may suffer more distortions. Align Technology, Inc. may be inconsistently valued because its brand is unclear. AT has earnings growth, but analysts’ expectations dropped in Q1 of 2024. Management is showing high expectations, with $1.2B authorized for repurchase. The split in expectations is likely a misunderstanding of Align Technology, Inc.’s brand strength with young customers that is driving earnings.
Finance
Better Communications Create Stable Valuations
In this sector, we see how brands that create a clear understanding of their brand enjoy greater stability. We note that compared to technology and medical device sectors, virtually all of the companies selected enjoy greater stability in their valuations. This is largely owing to the clarity by which the company is understood. Most famously is the annual Berkshire Hathaway letter from Warren Buffet and a multi-channel weekend event in Omaha providing businesses the opportunity to explain their strategies. Also, recent efforts from companies like American Express show how clearer understanding of the business can dramatically improve share price. While the many regulations for disclosure existing in this industry help understanding, almost all the brands go beyond the must-haves to show how their brands are differentiated.
Investor Relations and Brand Comprehension
Despite companies naturally wanting to increase their share price, our research found that few companies have optimized their brand communications to get an accurate P/E evaluation. Qualitative and quantitative survey results from 241 investor relations professionals, analysts and journalists representing 27 industry sectors revealed an important learning: while the investment community values brand, they do not have a deep understanding of it.
Brand was recognized as the second most important consideration to valuation by this sample of analysts and journalists, falling only behind financial forecast.
This audience is also aware of the significant impact brand has on valuation, with 76% stating that brand has a moderate to large impact on changes to P/E ratio.
However, understanding of brand is low amongst this key audience, with just 10% of surveyed analysts and journalists saying that they have a deep understanding of the positioning and strategy of the companies in their portfolio. The actual number of analysts and journalists that actually deeply understand this positioning could be even lower than reported, as only 3% of investor relations professionals believe that investment analysts have a deep understanding. A deep understanding of brand and its impact on future earnings is an important factor of whether or not a company is properly valuated. Most companies are not getting full credit for their branding efforts as part of investment community valuations.
A Solution on the Horizon
While the investment community currently lacks the deep understanding of brand that is needed to create an accurate valuation, they are seeking to learn more. While less than half of analysts and journalists said that they often or almost always receive a briefing from the company they’re evaluating, 64% said they would like to be briefed at that frequency.
Additionally, this vital audience has the time to dedicate to curating that deep understanding. Journalists and analysts have both the time and the willingness to understand brand in-depth.
We’ve identified the current shortcomings and disconnect between share price and understanding of brand, but how do we bridge the gap? The answer may come from the same established techniques that informed this research. In order to potentially boost understanding around your brand and increase share price, there are four key steps that create a basis for improvement:
01
Develop a brand valuation model
Showing how brand strength, role of brand and financial performance work together, a brand valuation model helps strengthen understanding of how well a brand is working to deliver shareholder returns.
02
Conduct financial community research
Develop a foundational understanding of how the investment community currently perceives your brand. How aligned are these perceptions with the actual brand—and what differences are the most detrimental to your valuation?
03
Analyze communication effectiveness
Conduct a review of your current investor relations and public relations plans to determine which of your touchpoints and assets need to be improved. This can range from incremental change to a true transformation.
04
Revise your brand strategy
Determine what isn’t working for your brand in order to change perceptions, such as ensuring you have a Purpose that guides action against a time-bound, measurable Ambition. This will help build an understanding of what drives performance and where your brand has the potential for Iconic Moves. As the strategy evolves, the team will need to provide continuous updates to continually shift perceptions in your brand’s favor.
Ready to take the first steps
to potentially boost your share price?
Powerful brands need a powerful network of partners.
Reach out to our team of experts to get started.
Greg Silverman
Senior Director Brand Economics
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Daniella Giavina-Bianchi
Chief Strategy Officer
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Andrew Miller
Chief Growth Officer
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