PHILIP MORRIS FINANCIAL ANALYSIS Harvard Case Solution & Analysis

PHILIP MORRIS FINANCIAL ANALYSIS Case Solution

1 Introduction

            The financial analysis for Philip Morris International Inc has been performed in this report. The three competitor companies that have been selected, against which to analyze the performance of Philip Morris Company are British American Tobacco, Altria Group Inc., and Japan Tobacco Company. All three competitor companies have the highest market capitalization of all the companies in this industry.

The main improvement opportunities for Philip Morris Company identified in this financial analysis are that the company has negative equity, which is due to its carrying forward of the accumulated losses in the past years; the company therefore needs to control its accumulated losses for the past years. Apart from this, the sales growth rate for Philip Morris is also low. The management of the company needs to increase its sales by increasing its selling prices or selling more sales units. Furthermore, looking at the capital structure of the company, we expected a higher cost of capital for the Philip Morris Company. However, the cost of capital for the company is too low.

The WACC is too low for Philip Morris Company because of the negative equity on the balance sheet on the company and the higher cost of equity, as compared to the cost of debt. The company has a high amount of debt on its balance sheet, which increases the risk for equity holders and thus the cost of equity is high. Finally, when we performed the valuation of the stock of Philip Morris Company based on this discount rate and the computed free cash flows, we found the stock of the company undervalued. The intrinsic value of the stock is much higher than the market price.

2 Corporate Valuations

2.1 Financial Statement Analysis

            The range of the financial statement ratios have been computed for Philip Morris Company, its three competitors, and industry average. If we first analyze the liquidity ratios of the company, then we can see that the current ratio and the quick ratios for Philip Morris Company are average as compared to the industry ratios. British Tobacco and Japan Tobacco have much higher liquidity ratios. The industry liquidity ratios are double of the liquidity ratios for Philip Morris Company.

            If we look at the asset management ratios of the company, the fixed asset and the total asset turnover ratios for Philip Morris Company are higher than the competitor companies and close to the industry averages. The inventory turnover ratio is low as compared to all the competitors and the industry; this is because of the high inventory levels maintained by the company. This is the reason due to which the days sales inventory are also high for Philip Morris Company.

            If we look at the debt ratios of the company, then the debt ratio for Philip Morris is highest among all the competitors and the industry average as well. The company also has issues with repayment of its outstanding obligations, which are seen by the low time interest coverage ratio of the company. The profitability position of the company is good if we look at the profit margin ratio of the company. The net margin is higher than the industry average and slightly lower than British Tobacco and Altria group. The basic earning power ratio for Philip Morris Company is also highest among all, which is because of the high interest expense on the high debt level of the company. Furthermore, Tax is not an issue for the company......................

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