Phillip Morris Analysis Essay Example
Phillip Morris Analysis Essay Example

Phillip Morris Analysis Essay Example

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  • Published: April 27, 2017
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Introduction (Reuters) Philip Morris International Inc. (PMI), incorporated in 1987, is engaged in the manufacture and sale of cigarettes and other tobacco products through its subsidiaries and affiliates. Its products are sold in approximately 160 countries. PMI’s portfolio comprises both international and local brands. Its portfolio comprises both international and local brands, which include Marlboro, Merit, Parliament, Virginia Slims, L&M, Chesterfield, Bond Street, Lark, Muratti, Next, Philip Morris and Red & White.

PMI divides its markets into four geographic regions: The European Union (EU); The Eastern Europe, Middle East and Africa (EEMA); The Asia Region, and The Latin America and Canada Region. In February 2009, the Company purchased the Petteroes tobacco business, which includes fine-cut trademarks primarily sold in Norway and Sweden. In September 2009, PMI acquired Swedish Match South Afr

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ica (Proprietary) Limited. Separation from Altria Group, Inc. Prior to March 28, 2008, PMI was a wholly? owned subsidiary of Altria Group, Inc. (“Altria”).

On January 30, 2008, the Altria Board of Directors announced Altria’s plans to spin off all of its interest in PMI to Altria’s stockholders in a tax? free transaction pursuant to Section 355 of the U. S. Internal Revenue Code. The distribution of all of our shares owned by Altria (the “Spin? off”), was made on March 28, 2008 (the “Distribution Date”), to stockholders of record as of the close of business on March 19, 2008 (the “Record Date”). Altria distributed one share of our common stock for each share of Altria common stock outstanding on the Record Date.

Acquisitions and Other Business Arrangements As of December 31, 2009, PMI operated and owned 58 manufacturing facilities, operated two leased manufacturing facilities, one in Kore

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and one in Mexico, and maintained 30 contract manufacturing relationships with third parties. In addition, it works with 37 third-party operators in Indonesia who manufacture its hand-rolled cigarettes. During the year ended December 31, 2009, 24 of its facilities each manufactured over 10 billion cigarettes of which six facilities each produced over 30 billion units.

PMI’s international brands contributing approximately 74% of its shipment volume in 2009. The Company owns a number of local brands, such as A Mild, Dji Sam Soe and A Hijau in Indonesia, Diana in Italy, Optima and Apollo-Soyuz in Russia, Morven Gold in Pakistan, Boston in Colombia, Belmont, Canadian Classics and Number 7 in Canada, Best and Classic in Serbia, f6 in Germany, Delicados in Mexico, Assos in Greece and Petra in the Czech Republic and Slovakia. Income Statement In the year 2009, PMI’s Gross profit decreased by 2. 22% to $16. billion, compared to 16. 16% increase in 2008, while net earnings decreased by 8. 36% to 6. 5 billion, compared to 13. 24% increase in 2008. This decrease was primarily due to higher interest expense, net, and lower operating income (attributable to unfavorable currency, partially offset by higher results from operations). Diluted and basic EPS of $3. 24 and $3. 25, respectively, decreased by 2. 1%. Excluding unfavorable currency impact of $0. 53, PMI reports that diluted EPS increased 13. 9%. Consolidated Statements of Earnings (in millions of dollars, except per share |Years | |Change | |data) |2009 |  |2008 |  | |  |Philip Morris (PM) |Imperial Tobacco |Altria Group (MO) |Reynolds American | | | |(ITYBY) | |(RAI) | |Net Revenue |62,080 |26,517 |23,556 |8,419 |

Industry Comparison (Reuters)

|  |Philip Morris (PM) |Imperial Tobacco (ITYBY) |Reynolds American (RAI)|Sector Average | |Receivable Turnover (TTM)|22. 05 |9. 37 |4. 34 |21. 25 | |Days to Collect |16. 55 |38. 95 |84. 1 |17. 2 | Allowance for doubtful accounts is $33M in 2009 and $14M in 2008. This represents 1% and 0. 5% respectively. This is relatively low, but makes sense given the nature of the business.

The product is relatively a low cost and stable consumer good. This percentage is inline with industry averages and means that Philip Morris is effective in collecting accounts. Inventory FIFO is used for inventory valuation. Lower of cost-or-market is used for valuation. This means that the balance sheet is closer to reality than the income statement. However, given the nature of the business and the relatively short life of its products, LIFO and FIFO should not make a large difference in income or balance statements. Leaf tobacco, the primary component of inventory, is listed as current inventory.

This is despite the fact that sometimes the aging process means that tobacco will not be used within one year. Inventory turnover is calculated only using product related current assets. COGS / Avg. Inventory: |Inventories |2009 |2009 | |Leaf tobacco             |3,924         |4,018 | |Other raw materials         |1,137         |1,205 | |Finished product 4,603         |4,148 | |Total |9,664 |9,371 | Inventory Turnover (Reuters) |  |Philip Morris (PM) |Imperial Tobacco (ITYBY) |Reynolds American (RAI)|Sector Average| |Inventory Turnover (TTM) |5. 81 |7. 64 |51. 76 |6. 25 |

Inventory turnover is a bit lower than the several of its peers, however close to the sector average. Need

trends. Fixed Assets Fixed assets consist of land, buildings, machinery, and construction. Machinery comprises the majority of fixed assets ($7,591K / $12,258K) = 61%. This does not account for accumulated depreciation of $5,868K which is not broken out by fixed asset class. Given the lower proportion of land compared to plant and equipment, it is likely that Philip Morris does not own the land where tobacco is grown. Rather they buy leaf tobacco from local producers. Fixed Assets Composition and Aging   |Philip Morris (PM) |Imperial Tobacco (ITYBY) |Reynolds American (RAI)| |Land |579 |1,147 |88 | |Buildings |3,593 |----- |661 | |Equipment |7,591 |----- |1,759 | |Plant and Equip |11,184 |1,375 2,595 | |Accumulated Depreciation |5,868 |558 |1,570 | |% Depreciated |52% |40% |60% | |Long Term Assets - Net Book Value |6,390 |2,010 |1,025 | Straight-line depreciation is used over the estimated useful life of plant and equipment. Machinery and equipment is depreciated over periods ranging from 3-15 years.

Buildings and improvements are depreciated over 40 years. Based on depreciation, equipment is approximately ? way through its useful life. This seems to be in the mid-range of two competitors: Imperial Tobacco and Reynolds American. Return on Assets (PM 10K and Reuters) |  |Philip Morris (PM) |Imperial Tobacco (ITYBY) |Reynolds American (RAI)|Industry Average | |Net Revenue |62K |26K |84K |----- | |5 year capital expenditure growth rate |0. 1 |22. 64 |8. 91 |9. 45 | |Return on Assets |20. 61 |4. 86 |7. 09 |3. 19 | |Return on Assets (5 yr avg) |22. 69 |4. 59 |6. 68 |7. 84 | Philip Morris has a very high return on assets, several times higher than

the industry average.

This seems especially high given that their 5 year capital expenditure rate is lower than their industry peers. The 5 year investment number may well be an artifact of the 2007 split from Altria. The high return on assets number is likely a result of acquisitions in which they acquired revenue and manufacturing facilities (long-term assets). Asset impairment and exit costs were as follows:  Asset impairment expenses are listed as $29M in 2009, up from $84M in 2008 and $208M in 2007. However, the majority of these expenses were due to exit costs from Altria Group.

However, expenses are not broken out between the two. Need to look in footnotes for specific PPE impairment. Goodwill & Intangible Assets Goodwill represents a major component of the balance sheet. A major component of PMI’s growth strategy is the acquisition of international brands. Goodwill in the last few years is due primarily to PMI’s acquisitions in Indonesia, Canada, Mexico, Greece, Serbia, Colombia and Pakistan. Significant amount of Goodwill and other intangible assets are due to the acquisition of companies and copyrights. This is in alignment with their stated strategy. pic] The increase in goodwill from acquisitions during 2009 was due primarily to the final purchase price allocation from PMI’s September 2009 purchase of Swedish Match South Africa and its February 2009 purchase of the Peteroes tobacco business and its 2008 acquisition of Rothmans’ Inc. in Canada. 2008 goodwill was due to the Canadian acquisitions and final acquisition price allocation for Pakistan and Mexican brands. Acquisitions also have resulted in a number of amortizable and non-amortizable intangible assets. Non-amortizable intangible assets consist largely of trademarks.

Amortizable assets consist of

certain trademarks, distribution networks, and non-compete agreements associated with certain trademarks. Intangible assets are amortized over their estimated useful lives. This ranges from 5-40 years for trademarks and 10-30 years for distribution networks and other definite-lived intangible assets. Intangible assets and good will are measured for impairment annually. Philip Morris has not recorded impairment cost for good will and intangible assets during 2007-2009. This may well affirm their international acquisition strategy.  Other Assets Current assets are listed as $822M.

They are not broken out by line item on the balance sheet. The one asset class listed in the financial foot notes is ‘Hedging Instruments’. This is relatively small at 2% of total assets. Liabilities Current Liabilities [pic] PMI’s Total Current Liabilities are 11,178 million in 2009 and 10,144 million in 2008. A majority of these are taxes that comprise roughly 43% of the total. Accounts payable are 670 million, indicating that PMI does not purchase on credit very extensively. Short-term Debt - P-1 rating by Moody’s [pic] Commercial Paper – 1,350 in 2009 with an average rate of 0. % and 1,020 in 2008 with an average rate of 1. 3% They have two $6 billion commercial paper programs with 1. 4 billion outstanding in 2009 and 1 billion in 2008. This gives them ample liquidity. Bank Loans - 312 in 2009 with and average rate of 7. 8% and 375 in 2008 with an average rate of 12% Since Bank Loans rates are high and volatile at a average 7. 8%, a majority of the short term debt is through issuances of Commercial Paper. Revolving lines of credit  They have 3 revolving lines of credit

amounting to 6. 4 billion. They currently have 0 borrowings from the revolving credit facilities.

They monitor the credit quality of these credit providers and have no indication of non-performers. These facilities must have an EBITDA ratio to interest of not less than 3. 5 to 1. They have subsidiaries that maintain their own working capital, which is approximately 2. 3 billion. Subsidiary borrowings amounted to 300 million. The revolving credit lines coupled with operating cash flows provide enough liquidity to stop issuances of short-term debt, specifically commercial paper. Future prospects are to reduce short term debt issuance. Long-term Debt - A2 Rating by Moody’s

Amounts specified in Long term debt represent the expected cash payments, including capital lease obligations (Vending machines in Japan).  PMI has issued 13,754 million in notes. This is a combination of foreign currency and U. S. notes. [pic] While in 2010 the amount of notes due is 82, we see an increase in notes due each year. Other Long term debt Colombian Investment and Cooperation Agreement - June 19, 2009, PMI announced a agreement with the Republic of Colombia(note 18) to promote investment and cooperation with respect to the Colombian tobacco market and to fight counterfeit and contraband tobacco products. 3 million of discounted liabilities. RBH Legal Settlement - 243 million accrued discounted settlement charges in 2009. reflected in other long term liabilities. Leases PMI does not have significant operating or capital leases. One capital lease included in the long-term debt total is primarily associated with vending machines in Japan and amounts to 187 million in 2009. Pensions & Other Postretirement Benefits After the spinoff, all benefits provided by Altria are now

provided by PMI. Its pension plan is a defined benefit plan.

As of 2009, PMI has a 288 million benefit obligation and the market value of the pension assets are 197 million which means there is a 91 million pension liability, in the U. S. Internationally, PMI has a 4,589 million benefit obligation with assets valued at 4,240 million which means there is a 349 million liability. So currently, both U. S. and International pension plans are under funded. The plan’s assets are split 60/40 between equity and debt and focuses primarily on U. S. Equity indexes and investment grade debt securities. There are no investments in hedge funds or derivatives.

Accumulated Post-Retirement benefits are 92 in US and 83 internationally. These costs consist of healthcare costs and a weighted average assumption approach has been used to determine future postretirement obligations. Also included are postemployment benefits (primarily severance), which nets to 118 million for 2009. The accrued total is 630 million(unpaid). Deferred Income Tax Liabilities  Deferred Income taxes increased year over year and currently is 1,139. PMI uses straight line to determine depreciation for financial reporting.

For tax purposes, (although not stated), they use a accelerated depreciation which accounts for the deferred income tax liability. Tax assets were generated mainly due to Postretirement benefits and accrued pension costs. Tax liabilities were generated due to Trade names (associated with the acquisitions of many smaller corporations), Property, plant and equipment and Unremitted earnings. Other Liabilities  Product Liability, consumer protection, antitrust and tax legal proceedings are potential liabilities as costs are paid for by PMI.

PMI has a large number of small claims cases as well as a few large ones. The

large number of lawsuits is expected in this industry. Shareholders’ Equity Common Stock PMI has issued 2,109,316,331 of common stock shares at no par value. After repurchasing shares, the number of outstanding 1,785,111,232 with a book value of 6,145,000,000 Book value per share = 6,145,000,000 / 2,109,316,331 = $3. 43 Cash Dividends & Stock dividends Total dividends declared 4338 and total dividends paid in 4327 million. The difference is paid out in stock dividends.

They have two dividends that they pay, 1 to Altria Group as part of a special dividend from the spin-off and dividends to shareholders at $2. 24 per share. Stock Options [pic] The fair value of the options awarded was determined using a modified Black-Scholes methodology. The weighted Average exercise price is 24. 10 with an average of 1 year remaining in their contractual term. Outstanding options amount to 13. 5 million. 10 million options were exercised or cancelled in 2009. Restricted and Deferred Stock Awards PMI may grant restricted stock and deferred stock awards to eligible employees.

Restricted stock and deferred stock awards generally vest on the third anniversary of the grant date. Repurchased PMI repurchased and retired 324,205,099 shares aggregated in 2008 & 2009 |2008 |2009 |Total Repurchased | |222,151,828 |102,053,271 |324,205,099 | Average share price at which stock was repurchased: In 2009 and 2008: 10,228,000,000 / 222,151,828 = $46. 04 , 5,154,000,000 / 102,053,271 = $50. 50 Additional Paid-In Capital There is no common stock at par value.

The Amount in Paid in capital is 15,358 in 2009. Preferred Stock (if applicable) 250 million shares of preferred stock without par value were authorized but unissued. PMI has no plans to issue

Preferred Stock. Other comprehensive income Currency exchange rate translation severely inhibited PMI’s Cashflow in 2008 due to a drop in the value of the Euro, and has since mildly recovered in 2009. Statement of Cash Flows The table below describes eight general relationships between the three sections of the statement of cash flows, depending on the company’s industry and stage in its growth cycle.

PM’s Statement of Cash Flows for 2009 indicate that for the year, Operating cash flow was positive (+), Investing cash flow was negative (-), and Financing cash flow was negative (-), placing the company in Relationship 4. |Relationship |1 |2 |3 | Net cash flow provided by operating activities decreased by a small amount from 2008. Depreciation stayed relatively consistent year over year. With $7,884 million in net cash, PM has a strong positive cash flow for 2009.

This is indicative of a stable and healthy company, and allowed the company to meet the needs of investing activities. In 2009, PM made continuous and new investments in its business by spending $1144 million in total on capital expenditures and acquiring other businesses. This negative cash outflow in investing activities is characteristic of stable or growing companies. While it is a good sign that PM is spending cash on investing activities, having available cash provided by its operating activities to pay for these investing activities is key. Consolidated Statements of Cash Flows | | | |Year Ending | |Cash Provided by (Used in) Operating Activities |2009 |2008 |2007 | |Net earnings | | |6,552 |7,150 |6,314 | |Adjustments to reconcile net earnings to operating cash flows: | | | | | |Depreciation | |853

|842 |748 | | |Deferred Income Taxes | |129 |5 |(22) | | Equity loss from RHB Settlement |0 |124 |0 | | |Colombian investment and cooperation agreement charge |135 |0 |0 | | |Gain on sale of business | |0 |0 |(52) | | |Asset impairment and exit costs, net of cash paid |(27) |(15) |77 | | |Net Cash effects from acquired and divested companies | | | | | | |Receivables | |(187) |(25) |(828) | | | |Inventories | |660 |(914) |(1,277) | | | |Accounts Payables |(116) |(90) |47 | | | |Income Taxes | |5 |39 |219 | | | |Accrued liabilities and other current assets |190 |857 |239 | | |Pension plan contributions | |(558) |(262) |(95) | | |Changes in amounts due from Altria Group, Inc. nd affiliates |0 |37 |(27) | | |Other | | |248 |187 |207 | | | |Net cash provided by operating activities |7,884 |7,935 |5,550 | |Cash Provided by (Used in) Investing Activities |  |  |  | | |Capital expenditures | |(715) |(1,099) |(1,072) | | |Proceeds from sales of businesses | | |87 | | |Purchase of businesses, net of acquired cash |(429) |(1,663) (1,519) | | |Other | | |46 |(399) |(82) | | | |Net cash used in investing activities |(1,098) |(3,161) |(2,586) | |Cash Provided by (Used in) Financing Activities |  |  |  | | |Net Issuance (repayment) of short-term borrowings |246 |(449) |2,162 | | |Long-term debt proceeds | |2,987 |11,892 |4,160 | | |Long-term debt repaid | |(101) |(5,736) |(3,381) | | |Repurchases of common stock |(5,625) |(5,256) | | | |Issuance of common stock

| |177 |118 | | | |Changes in amounts due from Altria Group, Inc. and affiliates | |664 |370 | | |Dividends paid to Altria Group, Inc. |(3,019) |(6,560) | | |Dividends paid to public stockholders |(4,327) |(2,060) | | | |Other | | |(268) |(332) |(345) | | | |Net Cash used in financing activities |(6,911) |(4,178) |(3,594) | | | | | | | | | |Effect of exchange rate changes on cash and cash equivalents |134 |(566) |346 | |Cash and cash equivalents: | | | | | | |Increase (Decrease) | |9 |30 |(284) | | |Balance at beginning of year | |1,531 1,501 |1,785 | | |Balance at end of year | |1,540 |1,531 |1,501 | |Cash paid: Interest | |743 |499 |301 | | |Income taxes | |2,537 |2,998 |2,215 | PM reported a cash outflow of $6,911 million used in financing activities. The company repaid a relatively small amount of $101 million in long-term debt, and also paid a large sum of $4,327 million in dividends to public stockholders. Together, these financing activity outflows totaled $4,428 million, and indicate PM’s ability to not only meet its debt obligations but also to continue the rewarding of its shareholders through consistent dividend payments.

There are two other major items worth mentioning in analyzing PM’s financing activities: 1) the cash inflow of roughly $3,000 million from borrowing long-term debt and 2) the spending of cash to repurchase $5,625 million worth of common stock in 2009 and $5,256 million in 2008 respectively. Obtaining long-term debt is typical for a stable company such as PM. It is important to note that the repurchase of

common stock is not an obligation of PM, but rather a strategic move. A stock repurchase is a one-time distribution of cash to shareholders if they choose to sell their shares back to the company. If PM management decided against a stock repurchase, its only major financing activity outflow would be its dividend payment. Free Cash Flow It helps to analyze PM’s free cash flow in 2009 to understand its cash liquidity position.

Free cash flow is the cash remaining after the company undertakes its operations less capital expenditures. We take it a step further by subtracting dividends. Net cash provided by operating activities  7884 Less Capital Expenditures                         715 Less dividends                                           4327 FCF = $ 2,842 million Overall, PM generated enough cash from its operating activities to make investments in its business. With almost $3 billion in free cash flow, which takes the cash paid in the form of dividends to shareholders into account, PM has a strong liquidity position. Despite being spun off, in analyzing the Statement of Cash Flows, PM seems to be a very stable and profitable company. VI. Ratios

We determined that the analysis of ratios is more effective when compared with its peer group. We picked Imperial Tobacco Group PLC (ITYBY) and Reynolds Group (RAI) which has a similar portfolio as Phillip Morris to compare with the company. Financial Ratios: Basic Earnings Per Share: | |Phillip Morris |Imperial Tobacco Group |Reynolds Group | |2007 |2. 86 @1943 shares |2. 30 @774. 3 shares |2. 22@588. 77 shares | |2008 |3. 32 @2068 shares |1. 00 @849. 50 shares |2. 29@584. 89 shares | |2009 |3. 25 @ 2109 shares |1. 02

@1012. 30 shares |1. 65@582. 76 shares | Earnings Per Share (EPS) Ratio (Fully Diluted): |Phillip Morris |Imperial Tobacco Group |Reynolds Group | |2007 |2. 86 @ 2109 shares |2. 29@777. 64 shares |2. 22@589. 78 shares | |2008 |3. 32 @ 2078 shares |0. 99@849. 50 shares |2. 29@586. 15 shares | |2009 |3. 24 @ 1950 shares |1. 01@1015 shares |1. 65@583. 65 shares | Phillip Morris has a higher earnings per share compared to its peer companies. The earnings per share increased 16% from 2007 to 2008 but decreased from 2008 to 2009 by 2. 5%. Considering the touch economic market and uncertainty in markets, it is a positive result for PM to be able to maintain the same EPS ratio.

Price – Earnings (P-E) Ratio: | |Phillip Morris |Imperial Tobacco Group |Reynolds Group | | |High |Avg |Low | |2007 | |3. 10 |4. 85 | |2008 |3. 54 |3. 51 |8. 43 | |2009 |4. 65 |4. 04 |6. 51 | The dividend yield is in line with its peer group. The dividend is only 4% of the market price per share. The investors are paying premium price in comparison to the dividend payout.

This indicates that investors investing in this industry are looking more for stability and gradual financial growth in this company like any large company rather than swift growth and big dividends payout. The company meets the expectations of these investors. Dividend Payout: | |Phillip Morris |Imperial Tobacco Group |Reynolds | |2007 | |51. 60 |72. 08 | |2008 |45. 72 |137. 38 |74. 44 | |2009 |68. 40 |111. 61 |104. 99 | Phillip Morris has a lower

dividend payout ratio compared to its peers. This shows that the company is paying lower dividends per share in comparison to the earnings per share.

However the company is paying higher dividends per share in comparison to the earnings per share in the overall market. Liquidity Analysis Current Ratio: | |Phillip Morris |Imperial Tobacco Group |Reynolds Group | |2007 |1. 83 |0. 87 |1. 28 | |2008 |1. 47 |0. 67 |1. 28 | |2009 |1. 31 |0. 63 |1. 27 | While the current ratio has gone down in 2009, the ratio is still higher than 1 and also in line with its peer group. This indicates that PM is liquid and has short term assets to do so in the future.

There is no high risk that PM will face liquidity crisis based on this data. Profitability: Gross Profit Margin: | |Phillip Morris |Imperial Tobacco Group |Reynolds Group | |2007 |25. 52 | |45. 03 | |2008 |25. 73 |38. 19 |45. 02 | |2009 |25. 79 |36. 05 |46. 73 | The gross profit margin remained almost constant the three years. This is in line with its peer group. This is expected because the cost of goods sold is pretty much consistent year on year.

The gross margin itself is lower than the peer group and indicates that the company can improve operational efficiencies of the company in making the products. This allows PM to have a higher gross profit margin. |Operating Margin: | | |Phillip Morris |Imperial Tobacco Group |Reynolds Group | |2007 |16. 17 |43. 84 |26. 08 | |2008 |16. 10 |14. 84 |27. 81 | |2009 |16. 10 |16. 12 |28.

48 | | |Phillip Morris |Imperial Tobacco Group |Reynolds Group | |2007 |16. 08 |37. 71 |22. 97 | |2008 |15. 6 |6. 4 |24. 06 | |2009 |14. 8 |6. 41 |18. 22 | Pre Tax Margin: Net Profit Margin: | |Phillip Morris |Imperial Tobacco Group |Reynolds Group | |2007 |10. 9 |27. 59 |14. 50 | |2008 |10. 8 |4. 23 |15. 13 | |2009 |10. 2 |4. 50 |11. 43 | The net profit margin remained almost constant throughout the years. The company falls in the middle of its peer group in terms of its profit margin.

Over all the company can improve its operational efficiencies to improve the overall profit margins. Return on Equity: | |Phillip Morris |Imperial Tobacco Group |Reynolds Group | |2007 |40. 44 |106. 66 |18. 03 | |2008 |59. 67 |11. 53 |19. 53 | |2009 |95. 97 |10. 32 |15. 11 | Phillip Morris has an unusually high return on equity compared to its peers. This is because the company has a low share holder equity to asset ratio compared to its peers. However, the cost of PM share is also higher. Return on Assets: |Phillip Morris |Imperial Tobacco Group |Reynolds Group | |2007 |20. 86 |11. 21 |7. 11 | |2008 |21. 28 |2. 24 |7. 28 | |2009 |18. 78 |2. 17 |5. 32 | The ROA of PM is significantly higher than its peer group. This shows that PM is able to generate higher earning based on the assets. PM is performing much better than its competitors in this ratio. Return on Capital: | |Phillip Morris |Imperial Tobacco Group |Reynolds Group | |2007 |33.

60 |23. 46 |12. 1 | |2008 |36. 26 |11. 49 |13. 19 | |2009 |34. 36 |13. 43 |10. 24 | The company has a higher return on capital compared to its peers which indicates its efficiency on spending capital. Effective Tax Rate: | |Phillip Morris |Imperial Tobacco Group |Reynolds Group | |2007 |28. 93 |26. 27 |36. 95 | |2008 |28. 05 |28. 99 |37. 12 | |2009 |29. 11 |28. 36 |37. 29 |

Phillip Morris is paying interest rate in line with its peers. Debt and Interest Coverage Ratios: Total Debt-to Common Equity: | |Phillip Morris |Imperial Tobacco Group |Reynolds Group | |2007 |38. 92 |457. 96 |60. 47 | |2008 |159. 48 |194. 67 |75. 13 | |2009 |269. 70 |188. 18 |68. 27 | Debt to equity for PM is significantly higher compared to its peers. This is driven by its long term debt it acquired during its spin-off from the Altria group. Long Term Debt to Total Capital: |Phillip Morris |Imperial Tobacco Group |Reynolds Group | |2007 |25. 75 |64. 73 |24. 24 | |2008 |57. 27 |51. 42 |24. 71 | |2009 |63. 41 |50. 44 |22. 97 | The company has a high long term debt that it acquired during its spin-off. This resulted in a high long term debt to capital ratio compared to its peers. Debt to Total Assets Ratio: | |Phillip Morris |Imperial Tobacco Group |Reynolds Group | |2007 |19. 10 |56. 84 |24. 24 | |2008 |36. 28 |41. 99 |25. 1 | |2009 |44. 62 |38. 54 |24. 63 | The ratio is going up compared to its previous years. The ratio

is also higher compared to its peers. This is an indication that the company is financing its operations using debt more than its peers. This is also an indication that the company is conserving cash or has less cash on hand compared to its peers. Interest Coverage Ratio: EBIT / Interest Expense | |Phillip Morris |Imperial Tobacco Group |Reynolds Group | |2007 |33. 77 |2. 88 |6. 96 | |2008 |19. 57 |1. 8 |8. 95 | |2009 |12. 63 |0. 92 |9. 55 | The interest coverage ratio for PM is very high. This is an indicator that the company is not burdened with debt and is generating enough cash to cover the payments on its short term debt. This ratio is higher than its peers. The company is not in a risk of falling into a situation where the company cannot cover debt expenses. However the company has a lot of long term debt. We do not know the terms of that debt. If that debt becomes due or if the interest on that debt increases it could post a problem to the company.

The company is listed on the NYSE under the symbol PM. The current price is $59. 39. 52 week range is $28. 68 - $60. 87. PM’s current market capitalization is $107. 76B. Conclusion Given the quantitative and qualitative analysis above, we would invest in the company in the long term. PMI is a cash heavy company with ample liquidity. It leads the industry in almost all metrics. Short term In the short term, as young investors, it is unlikely we would invest in PMI in the short term. PMI

is a established corporation and a leader in the tobacco industry. As young investors seeking more risk with higher rewards, PMI’s steady cash flow and dividends signal less growth in the short term.

While we see PMI as a cash heavy company, with low amounts of debt, the growth rate in the short term is not high enough. Historically, the volatility in the Tobacco industry is insignificant. PMI is more suited for long term investing. Long Term Investing for the long term would require monitoring. PMI has significant free flowing cash and are currently ahead of competitors in most metrics. PMI has a high dividend rate which is an added incentive to hold on to their common stock. The reasons for monitoring PMI are the large number of lawsuits filed against PMI and also the nature of their business maybe significantly affected by the International laws and tobacco restrictions.

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