Our definition of tangible and intangible industry groups
Tangible assets are loosely defined as physical assets one can touch and feel, and which can be collateralised for loans. This definition is too broad and not meaningful, because in the consumer services industry group, which we have defined as driven by intangibles, you find companies such as Starbucks and McDonald’s which both employ a lot of physical assets in their business.
The way we have defined intangibles and tangibles driven industry groups was going back to 1998 and calculate the market value to assets for all the active companies at that point in time. We need calculated the average ratio for each of the 24 industry groups. All the industry groups with a ratio above the average of all groups we put into the intangibles. If the market value is substantially above the book value of assets on the balance sheet it must mean that the market is putting a value on something that is not there, or at least in accounting terms, and this is clearly the intangibles. So for McDonald’s they do employ a lot of physical assets but it is the branding, store network, product etc. that derives the meaningful value creation and thus the market is valuing the company way above the book value of its assets. One could argue that McDonald’s is a hybrid company but for our purposes we define it as being mostly intangibles driven.
The full list is presented below. Banks are interesting because many think they are driven by intangibles because it employs a lot of people, but the thing is that banks are essentially deriving their profits from the spread between loans and deposits. The majority of bank loans are tied to physical assets and thus banks are tightly connected to the physical world.
Tangibles driven industry groups
- Automobiles & Components
- Capital Goods
- Commercial & Professional Services
- Consumer Durables & Apparel
- Diversified Financials
- Food & Staples Retailing
- Real Estate
- Telecommunication Services
Intangibles driven industry groups
- Consumer Services
- Food, Beverage & Tobacco
- Health Care Equipment & Services
- Household & Personal Products
- Media & Entertainment
- Pharmaceuticals, Biotechnology & Life Sciences
- Semiconductors & Semiconductor Equipment
- Software & Services
- Technology Hardware & Equipment