One of the things I like to do occasionally to have fun with my stock selection process is to come up with creative ideas for identifying companies to recommend to readers. In 2021, I came up with seven stocks for a brand-centric portfolio.
The key to the selection: The companies had to have the word “brands” in their corporate name. Of course, they also have to have good businesses. At the time, I found 34 public companies with “brands” in their corporate name.
How did they do? It’s been a mixed bag in the nearly two years since. One was broken into two companies. Another was acquired by a private equity firm. The performance of the rest was all over the map.
I’ve done the same screen through Finviz and found 40 stocks for a brand-centric portfolio. Here are my top three.
Fortune Brands Innovations (FBIN)
Fortune Brands Innovations (NYSE:FBIN) is a carryover from my 2021 article. It is one of two companies created by separating Fortune Brands Home & Security in December 2022.
FBHS spun off its cabinets business into an independent, publicly traded company. MasterBrand (NYSE:MBC) includes Aristokraft, Diamond, Kemper, KitchenCraft and several other brands, generating annual sales of $3.3 billion through a network of more than 4,500 dealers.
The remaining home, security and commercial building products businesses are held under the corporate name of Fortune Brands Innovations. Its brands include Moen faucets, Therma-Tru fiberglass entry doors, Master Lock mechanical padlocks and SentrySafe fire safes.
The company’s targets include 6% to 9% compound annual growth, or at least 200 basis points higher than the markets it competes in, along with EBITDA margins of 23% to 25%, with its Moen and Aqualisa water-related businesses leading the way. For 2023, it expects to earn $3.75 a share at the midpoint of its guidance with free cash flow of $475 million.
Long term, Fortune Brand’s ability to outperform its competitors ought to be good for its share price.
Driven Brands Holdings (DRVN)
Driven Brands Holdings (NASDAQ:DRVN) is the parent company of Meineke, Maaco, Take 5, Carstar, Fix Auto and several other automotive services brands. Since going public in early 2021 at $22 a share, the stock is up 18% compared with a 16% gain for the S&P 500.
For the first quarter, revenue increased by 20% year over year to $562.5 million on the back of 9% same-store sales growth at its 4,864 locations across the U.S. and 13 other countries. As for profitability, adjusted EBITDA of $127.8 million was 8% higher than in Q1 2022, with its maintenance business leading the way with $73 million in adjusted EBITDA on $227.7 million in revenue.
For all of 2023, management expects revenue of $2.35 billion with $590 million in adjusted EBITDA and adjusted earnings per share (EPS) of $1.21.
The company operates with a relatively asset-light business model where 25% of its locations are company-owned, with the rest franchise or independently operated stores. Meanwhile, Driven Brands should benefit from the rising cost of new and used cars, which is causing people to keep their existing vehicles longer and, thus, spend more money on repairs.
Topgolf Callaway Brands (MODG)
Topgolf Callaway Brands (NYSE:MODG) has performed poorly over the past five years, down 3% compared to a 58% gain for the S&P 500. Meanwhile, shares of competitor Acushnet Holdings (NYSE:GOLF), the maker of Titleist golf clubs and balls, Footjoy golf shoes and Scotty Cameron putters, have more than doubled during this time frame.
Yet, as far as I can tell, the big difference is that Topgolf Callaway, whose brands include Topgolf, Callaway Golf, TravisMathew, Toptracer, Odyssey, OGIO, Jack Wolfskin and World Golf Tour, doesn’t seem to get the love from investors that it should. From a valuation perspective, MODG looks like the better play, trading at 0.9 times sales, compared with 1.6 for GOLF.
In Q1, the Topgolf segment, which operates large, open-air golf entertainment venues, generated revenue of $403.5 million, nearly 26% higher than a year earlier and accounting for close to 35% of its revenue. However, the segment’s operating income was just 0.7% of revenue, compared to 18.4% for its Golf Equipment segment and 11.6% for its Active Lifestyle apparel segment.
Overall, first-quarter sales increased by 15.1% year over year, excluding currency fluctuations, to $1.17 billion, with $121.7 million in operating income, up 3.7% year 0ver year.
What investors ought to consider is that the first quarter saw a fairly even distribution of sales between Topgolf (35%), Golf Equipment (38%) and Active Lifestyle (27%). That’s a good place to be when you’ve got three evenly contributing revenue streams. Watch out if the operating profits do the same at some point in the future.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.