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Can Breville Group Ltd cook up some big share price gains?

Breville

It is widely accepted that the right brand can provide a competitive advantage to a company, making shares in that company a sound investment. However, it is difficult to pinpoint exactly how much a brand is worth or why some are more powerful than others.

A strong brand is clear, trustworthy and desirable, encourages loyalty and connects with people emotionally. These qualities sell products and provide pricing power because customers are willing to pay more for a well branded product than an identical unbranded product. Companies with strong brands therefore enjoy market dominance and healthy margins, enriching shareholders in the process.

Breville Group Ltd (ASX: BRG) is an example of a company with an excellent brand. Instantly recognisable and a strong association with quality, the Breville name ensures that its small kitchen products succeed in the highly competitive US market. The company also operates substantially in Australia and is seeing rapid growth in its “rest of the world” segment.

Breville is investing in its brand through a partnership with Nespresso in Australia and the appointment of Heston Blumenthal as a global brand ambassador. Connections with renowned names such as these will strengthen Breville’s appeal among its prospective and existing customers.

Breville acquired the culinary division of American company PolyScience at the end of 2014, which is the market leader for sous-vide products. Sous-vide is a method of cooking food in airtight bags in a water bath, popular in commercial kitchens because it provides greater temperature control and improves flavour. The company is planning to market sous-vide to the home cuisine market. Launching such innovative products is a wise strategy as it serves to further enhance Breville’s reputation.

The demise of Billabong International Limited (ASX: BBG) demonstrates the importance of maintaining brand strength. Its shares fell from $18 in 2007 and now trade at 61 cents. Part of the reason for this was Billabong’s failure to reinvent itself, causing it to lose touch with its young customer base.

Premier Investments Limited (ASX: PMV) holds a large stake in Breville, around 27% of the company. Premier Investments is split into two branches, retail and investment, and is heavily involved in the retail fashion industry for which branding is crucial. The company is therefore well placed to judge the merits of Breville, and is clearly impressed given its significant financial commitment.

Breville has performed well in recent times and earnings per share have grown by 20% per year over the last four years. Cash flows line up with profits and return on equity is consistently over 20%. This has allowed management to increase dividends by 24% per year over the last four years whilst simultaneously improving Breville’s net cash position from $9 million to $47 million.

Is it a buy?

Breville imports most of its products and so the weak dollar will negatively impact upcoming results. Despite this, the fast growing international business and innovative new products bode well for the future. At current prices, Breville is a little too expensive, but I would be interested in buying shares at closer to $5. It is a high-quality business primed for growth which boasts a truly international brand.

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Motley Fool contributor Matt Brazier does not own shares in any of the companies mentioned in this article.

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