Weekly Reputation Index Metrics

At the close of trading September 14, 2012, REPUVART and REPUVAR stood at 3129.59 and 2695.28 respectively. Over the past four weeks, the former has changed by 8.54%, while the latter has changed by 8.40%. The benchmark S&P500 Composite Index stood at 1276.71 (31 Dec 2001=1000) and has changed over the past four weeks by 3.36%.

Over the trailing twelve months, REPUVART and REPUVAR have, respectively, changed by 21.64% and 19.98% respectively; the S&P500 Composite Index has changed by 20.54%. Since January 2009, the REPUVART and REPUVAR have changed by 150.10% and 134.69% respectively; the S&P 500 Composite Index has changed by 57.31%.

Other interval changes in the magnitude of the indices are shown below.

Analysis

Global markets are rebounding. We suspect inflation is just over the horizon, but the equity returns are bankable today. This week, the spread for REPUVAR calculated by Dow Jones Indexes is up to 9.47% for the price index and 10.75% for the total returns index. Of note is the 14.8% spread between RepuStars-selected S&P500 (RepuSPX) and the S&P500 Composite, a pocket index.

Turning to companies who appear to have been undervalued at the start of this calendar year, the greatest gains in the 2012 RepuStars portfolio are being reported by American Eagle Outfitters (AEO) remaining in the #1 slot with a year-to-date return of 70.96%. Vertex Pharmaceuticals is back to the #2 position with a year-to-date climb of 59.96%. Holding on to third place is eBay Inc. (EBAY) at 56.50% for the year These are three of the 38 firms identified by the RepuStars Variety algorithm at the start of the year as value opportunities.

As for those whose reputational value has not panned out, the greatest disappointments this year remain the energy and mining concerns. To date, the bottom three are are Walter Energy, Inc. (WLT) at -42.2%, Federal-Mogul Corporation (FDML) at -34.05%, and AuRico Gold Inc (AUQ) at -21.04%

Side Note: A description of the 2012 portfolio constituents can be obtained here: click here.

Background

The RepuStars® Variety Corporate Reputation Index calculated by Dow Jones Indexes is the first-ever composite equity index based on a quantitative value strategy informed by the Steel City Re corporate reputation ranking metrics. The metrics comprise non-financial indicators of reputational value. The RepuStars Variety Index has two versions: a total returns index and a price index, whose ticker symbols are, respectively, REPUVART and REPUVAR.  Click here for real time quotes.

The RepuStars Variety Corporate Reputation Index tracks up to 57 company stocks that appear to be underpriced relative to their metrics as measured by Steel City Re’s proprietary Corporate Reputation Rank™, which tracks 7000 companies weekly. In using the RepuStars Index as an investment strategy, investors can take advantage of this price disparity. The principles behind Steel City Re's reputation metrics are discussed in the book, Mission:Intangible (see below).

The RepuStars indices are reconstituted annually in the first week of January and posted by Dow Jones Indexes in the third week. The Indices were last reconstituted 20 Jan 2012.  Click here for additional information on the index.

Reputation, Risk and Finance

Reputation management through superior control of a company's intangible assets may be one of the best paths to value creation today. If it is not on your agenda, perhaps it should be. Here are several things you can do right now to start creating value for your organization:

1. Become better informed. Participate in our regular Mission Intangible Monthly Briefings held on the first Friday of every month or read the book, Mission: Intangible. Managing risk and reputation to create enterprise value, available at the IAFS Store, specialty finance sector retailers, or other leading online book retailers. 
2. Become a member of the Intangible Asset Finance Society and engage.
3. Join our community on Linked-In and stay in the information flow.

Notices

STEEL CITY RE and REPUSTARS are registered trademarks of C. Huygens & Co. LLC and are used under license. Investment products based on the RepuStars Variety Corporate Reputation Indexes are not sponsored, endorsed, sold or promoted by Technology Option Capital, LLC, C. Huygens & Co, LLC, Steel City Re, LLC, or their respective affiliates and none of Technology Option Capital, LLC, C. Huygens & Co, LLC, Steel City Re, LLC and their respective affiliates make any representation regarding the advisability of investing in such products. Inclusion of a company in any of the indexes in this piece does not in any way reflect an opinion of Technology Option Capital, LLC, C. Huygens & Co, LLC, Steel City Re, LLC or any of their respective affiliates on the investment merits of such company. None of Technology Option Capital, LLC, C. Huygens & Co, LLC, Steel City Re, LLC or any of their respective affiliates is providing investment advice in connection with these indexes. The RepuStars Variety Corporate Reputation Indexes are calculated by Dow Jones Indexes, the marketing name and the licensed trademark of CME Index Services, LLC. (CME Indexes). Dow Jones Indexes is a service mark of Dow Jones Trademark Holdings LLC. (Dow Jones). Investment products based on the RepuStars Variety Corporate Reputation Indexes are not sponsored, endorsed, sold or promoted by CME Indexes, Dow Jones or their respective affiliates, and CME Indexes, Dow Jones and their respective affiliates make no representation regarding the advisability of investing in such product(s).

There was a time not long ago when Procter & Gamble's reputation for marketing prowess was a reflection of its competencies in both communications and product innovation--old school marketing comprising the 4 p's of product, placement, promotion, and pricing. That reputation translated into pricing power and outsized margins that wound their way down to net income and stock price. No more. Bloomberg reports that Procter and Gamble is now trading at a 22% discount to the 31-company Bloombert Industies Global Household Products Index.

The loss of innovation Mojo traces back to what was then celebrated as a brilliant stroke of open innovation. P&G let go of control of innovation, killed-off the not-invented-here bias, and advanced the mindset of "proudly invented elsewhere." By 2006, more than 35 percent of P&G's new products in market had elements that originated from outside P&G. The Harvard Business Review promoted this turn of events as an evolution to be emulated.

Increasingly, its looking like another case of it-seemed-like-a-good-idea-at-the-time. "There’s been a dearth of pioneering brands emerging from the world’s largest consumer-products company. Spending on research and development in fiscal 2012 ended June 30 was $2.03 billion, or 2.4 percent of sales, the same as the prior year and down from 3 percent of sales in 2006. P&G’s most recent homegrown blockbusters -- Swiffer cleaning devices, Crest Whitestrips, and Febreze odor fresheners -- all went on sale at least a decade ago, reports Bloomberg."

The Steel City Re reputation metrics indicate that P&G is a well regarded powerhouse ranking in the 95th percentile among the 43 members of the Household/Personal Care products sector. But its reputation is shaky. Its most recent reputational volatility is ranked in the 58th percentile of its peer group; for the past year, it was only ranked in the 14th percentile. There is no clear directionality, but our experience suggests that when a stable giant begins to shake, the direction is more likely than not downward.

The rest of the nation is sweltering under a general heat wave but it pales in comparison to the burning platform supporting Bob McDonald in Cincinatti. Activist investor Bill Ackman is wielding the torch.

Writes Slate Magazine (R Cyran, 13 July), “Procter & Gamble is a hulking target for an uppity investor like Bill Ackman… Since Bob McDonald replaced Lafley as CEO in 2009, the shares are up 16 percent. The S&P 500 index, however, has gained more than 40 percent over the same span, and rival Colgate’s stock is up almost 50 percent.” We could go on documenting the case being built agains McDonald. Let’s cut to the chase and turn to the Steel City Re reputation metrics.



Over the past few years, Procter & Gamble morphed itself from an marketing/R&D/product development giant into a marketing/licensing/sales machine. Only problem is, it is paying a premium for innovation and is being squeezed by the big box retailers on the other end of the value chain. What do the reputation metrics show? There are 347 companies in the Consumer Non-Durables sector of which 44 compete in the Household/Personal care Industry where Procter & Gamble is one of 20 firms with market caps of $175 billion +/- 35%. Among this peer group, the company’s reputation rank has slipped to the 91st percentile. All of its directional derivative metrics – both its velocity and vector -- are negative. The vital signs chart shows that its reputation value is very volatile. Historically it ranked in the 7th percentile; now it is in the 68th percentile relative to its peers. Its return on equity is in the 60th percentile having lost 3% over the trailing twelve months (median -4%, S&P500 -0.6%). Forward looking metrics show an above average level of stability, which is not good when the trend is negative. Procter & Gamble is a company whose reputation once stood for innovation. The company monetized that innovation with fabulous marketing. It still has great brands, for sure, but what does that mean today if the value chain leaves little for the brand owner at the end?

“…it is a tale
Told by an idiot, full of sound and fury,
Signifying nothing.”

True or false: Finding himself unable to keep his fly in the full, upright, and locked position, Tiger Woods’ ethical downfall precipitated reputation-associated losses on the order of $12 billion by his sponsors?

FALSE. The Steel City Re Corporate Reputation Index shows no evidence of headline risk effects.

On 28 December 2009, Christopher R. Knittel and Victor Stango posted on the web their study, Shareholder Value Destruction following the Tiger Woods Scandal. These economists, associated with both the University of California, Davis, and NBER, reviewed the market behavior of six public sponsors of Mr. Woods—Accenture (NYSE:ACN), AT&T (NYSE:T), Nike (NYSE:NKE), Gillette (NYSE:PG), Electronic Arts (NASDAQ:ERTS) and Gatorade (NYSE:PEP). Using an ‘event study’ method, they concluded that shareholders of companies that Mr. Woods endorsed lost $5-12 billion in wealth between 27 November and 11 December. The authors imply headline risk as the proximate cause.

We disagree. While there were some market cap losses and fewer gains, we see no evidence of consistent decreased reputation metrics among the sponsors. Using tools described briefly at Steel City Re, and in more detail in the forthcoming book, Mission: Intangible. Risk and reputation management to create enterprise value, we see no change in reputation rank trends over the relevant two week window. We share exemplary Steel City Re Corporate Reputation Index metrics for four (4) of the companies alleged to have suffered the consequences of headline risk.

First, AT&T rewarded its shareholders over this period with a positive bump, although it was not as significant of a bump as the median of its 57-member peer group. Its Reputation Index also showed a small positive bump ending the period at the 92nd percentile. The bottom line: better reputation metrics over the critical period.


Second, Accenture and Nike showed no movement in their reputation metrics. In the charts showing the Reputation Index and its exponentially weighted moving average volatility for the past six months, Accenture is flat at the 94th percentile and Nike is flat at the 100th percentile. The bottom line: no change in reputation metrics over the critical period.



Last, in the chart showing both the Reputation Index for Electronic Arts and the both the median and variance of the index measurements for the Software Group sector, three things are apparent. First, Electronic Arts’ Reputation Index ranking continued its downward trend during the critical period. Second, the median reputation ranking for the entire sector slid over the course of the entire year. Third and last, there is much volatility in the variance of the index rankings in this sector. The bottom line: weaker reputation metrics over the critical period reflecting continuation of a year-long trend.


The data suggest that in this instance, the downfall of an iconic spokesperson generated significant press, much speculation, but ultimately nothing untoward with respect to his sponsors. Bottom line: No headline risk seen. Goodbye Tiger. Hello elephant and frog.

Procter & Gamble (NYSE:PG) serves four billion of the world's seven billion consumers with products comprising one of the strongest portfolios of trusted, quality, leadership brands. The have consistently scored in the top tenth percentile of the Steel City Re Corporate Reputation Index. The Financial Times’ Newssift sentiment metric reports that of the 218 news stories mentioning P&G’s reputation this past year, favorable stories outweigh unfavorable by a ratio of 8:1.

Brands are material to the Company. According to the 2009 annual report,

P&G is the brand-building leader of our industry. We’ve built the strongest portfolio of brands in the industry with 23 billion-dollar brands and 20 half-billion-dollar brands. These 43 brands account for 85% of sales and more than 90% of profit. Twelve of the billion-dollar brands are the #1 global market share leaders of their categories. The majority of the balance are #2. As a group, P&G’s billion-dollar brands have grown sales at an average rate of 11% per year for the entire decade.

In view of the above, and with a price to book ratio of 2.7, the lion’s share of the Company’s value comprises superiorly managed intangible assets. We felt therefore it would be instructive to see how this Company discloses its financial risks. In this basic analysis, we looked at the boilerplate blue sky Forward Looking Statement that trails any financial announcement in compliance with the Private Securities Litigation Reform Act of 1995. In our analysis, we looked at the 15 enumerated items that represent “certain factors that could cause actual results to differ materially from those anticipated” by the financial announcement, and we analyzed each to determine if the risk involved a physical asset or an intangible asset (business process).

This is what we found. Of the 15 enumerated risks, 14 centered on intangible asset management. The lone physical asset risk was the Company’s IT system. Among the 14 business process risks, we found three references each to the business processes of sales, marketing and supply chain management. We found two references each to innovation, intellectual property, finance processes, and business processes in general. Last, we found one reference each to brand management, human resource management, and geopolitical risk management. Reputation risk is specifically noted. Interestingly, and consistent with our observation that only risk managers look at the world from a risk perspective, is that the descriptive language of the risks comprised neutral-to-positive managerial verbs rather than disastrous end-state nouns.

From the above, it appears that even in risk management, a superior intangible asset manager such as P&G focuses on executing the business processes that are central to its enterprise value. And given their a 170 year history, perhaps this is their intangible secret to longevity?