Business Finance Project: Phillip Morris (PM) and Lorillard Inc. (LO)

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What Does these Businesses Have in Common

These businesses operate the largest cigarette production across the globe. For instance, PMI boosts of producing about 7 of the worlds’ 15 international cigarette brands. The company is the sole producer and distributor of Marlboro: a leading cigarette brand across the globe. On the other hand, Lorillard Inc. produces such cigarette brands as the “flagship premium cigarette”: Newport, a top selling menthol cigarette brand. Lorillard Company also produces electronic-based cigarettes.

How the Businesses Different?

First, there is the difference in the cigarette –related products that are manufactured. For instance, Lorillard Inc. produces mostly menthol-related cigarettes and electronic cigarettes. It is the leading electronic cigarette company within the United States. On the other hand, PMI is mainly focused on the production of the traditional tobacco-related cigarettes.

Second, there is the difference in the location of these establishments. While Lorillard Company has based its operations in North Carolina, PMI has its base in Virginia where it operates the Richmond factory.

Third, these companies showcase a difference in the manner in which production activities are carried out. PMI boosts of 56 production centers in more than 35 countries. This philosophy of conducting business does not apply to Lorillard Inc. The latter company conducts all of its production activities in North Carolina.

Provide Details on the Background/Education of Their Founders and Current Leaders

Accordingly, PMI opened its first store in London in 1847 by its founder Phillip Morris. The shop was used to sell tobacco and ready-made cigarettes. Upon his death, both the wife and brother Leopold transformed it to a public company in 1881 and later, renamed it to Phillip Morris & Co. Ltd. However, in 1902 the company’s ownership was split in half between its British parent and American partners (Phillip Morris International, 2010). Currently, the company is managed by Louis Camilleri and, he also holds a rank as the chairman of the board of directors. He possesses a degree in economics and business administration from HEC Lausanne Switzerland.

On the other hand, Lorillard Inc. was founded by Pierre Lorillard who established numerous stores in 1760 in New York City. Currently, the company is managed by Murray Kessler who also holds a rank as the chairman of the company’s board (Lorillard, 2010). He holds a Bachelor of Science degree in Business Administration from Villanova University and an additional Master of Business Administration in Marketing and Finance from New York University.

What Was The Business Philosophy Of The Founders?

Phillip Morris, the founder of PMI, adopted a diversified business strategy in the years of operations. For instance, he embarked engaging in the beer industry for which he acquired Miller Brewing Company. He also had showcased interests in General foods and thus acquired Seven-Up Company. However, with the growth witnessed in the tobacco-related industry, Morris opted to specialize in manufacture of the cigarettes.

Pierre Lorillard was a socialite who focused his savings in many businesses but never diversified in respect to the tobacco industries. He specialized in making cigarettes only. Lorillard concentrated in manufacturing such tobacco-related products as snuff.

What Is the Business/Management Philosophy of the Current Leaders?

Nowadays, PMI business philosophy is concentrated on maintaining quality of its products, intense engagement in R&D activities and participating in CSR projects in the areas of operations. The management functionality operates under a perpetuity philosophy in order to maintain both employees and the vast loyal customer-base. The company maintains product differentiation strategy.

On the other hand, Lorillard Inc. also adopts a differentiation business strategy. This is depicted by the decision to expand on its electronic cigarette manufacture. The company also generates menthol-linked cigarettes in order to tap into the vast potential smoking market niches.

Financial Ratio Analysis: PMI

Ratio: (I) Liquidity Ratios Year 2012 Year 2011 Year 2010
Current ratio=CA/CL 16,590/17,016=0.97 14,859/14,794=1 13,756/12,804=1.07
Quick ratio =CA-I/CL (16,590-8,949)/17,016= 0.45 (14,859-8,120) /14,794=0.46 (13,756-8,317)/12,804=0.42
(II) Leverage Ratios

Debt-to-Total Assets= Total debt/Total Assets

17,639/37,670=0.47 14,828/35,488= 0.42 13,370/35,050=0.38
Debt-to-Equity Ratio=

Total debt/Total stockholders’ equity

17,639/(3,154)=-5.6 14,828/551= 26.9 13,370/3,933= 3.4
Times-interest-Earned ratio= profits before interest and taxes/ total interest charges 13,846/859= 16.1 13,332/800=16.7 11,200/876=12.8
(III) Activity Ratios

Inventory turnover= sales/inventory of finished goods

77,393/3,791=20 76,346/3,472=22 67,713/2,977= 22
Fixed Assets turnover= sales/fixed assets 77,393/6,645=11.65 76,346/6,250=12.2 67,713/6,499=10.4
Total Assets turnover= sales/ total assets 77,393/37,670=2. 76,346/35,488=2.2 67,713/35,050=1.9
Accounts collection Period= Accounts Receivable/ total credit sales/ 365 3,589/(77,393/365)=16 days 3,201/(76,346/365)=15 days 3,009/(67,713/365)=16 days
IV) Profitability ratios: Gross profit margin= sales-cost of goods sold/sales (77,393-10,373)/77393=0.87 (76,346-10678)/76,346=0.86 (67,713-9713)/ 67,713=0.86
Net profit Margin= net income/sales 9,154/77,393=0.11 8,879/76,346=0.11 7,498/67,713=0.11
ROA=net income/total assets 9,154/37,670=0.24 8,879/35,488=0.25 7,498/35,050=0.21
ROE= net income/ total stockholder’s equity 9,154//(3,154)=-2.9 8,879/551=16.1 7,498/3,933=1.9
Earnings per share= net income/no. of common stocks 9,154/2,109,316=0.004 8,879/2,109,316=0.004 7,498/2,109,316=0.003

Financial Ratio Analysis: Lorillard Company

Ratio: (I) Liquidity Ratios Year 2012 Year 2011 Year 2010
Current ratio=CA/CL 2,777/1,601=1.73 2,564/1,485=1.73 2,935/1,426=2.08
Quick ratio =CA-I/CL (2,777-410)/1,601=1.48 (2,564-277)/1,485=1.54 (2,935-277)/1,426=1.86
(II) Leverage Ratios

Debt-to-Total Assets= Total debt/Total Assets

3,111/3,396=0.92 2,595/3,008=0.86 1,769/3,296=0.53
Debt-to-Equity Ratio=

Total debt/Total stockholders’ equity

3,111/(1,777)=-1.75 2,595/(1,513)=-1.72 1,769/(225)=-7.86
Times-interest-Earned ratio= profits before interest and taxes/ total interest charges 1,882/154=12.22 1,895/125=15.16 1,729/94=18.39
(III) Activity Ratios

Inventory turnover= sales/inventory of finished goods

6,623/410=16.15 6,466/277=23.34 5,932/277=21.42
Fixed Assets turnover= sales/fixed assets 6,623/619=10.70 6,466/444=14.56 5,932/361=16.43
Total Assets turnover= sales/ total assets 6,623/3,396=1.95 6,466/3,008=2.15 5,932/3,296=1.80
Accounts collection Period= Accounts Receivable/ total credit sales/ 365 18/(6,623/365)= 1 day 10/(6,466/365)= 1 day 9/(5,932/365)= 1 day
IV) Profitability ratios; Gross profit margin= sales-cost of goods sold/sales (6,623-4,241)/6,623=0.36 (6,466-4,123)/6,466=0.36 (5,932-3,809)/5,932=0.36
Net profit Margin= net income/sales 1,099/6,623=0.17 1,116/6,466=0.17 1,026/5,932=0.17
ROA=net income/total assets 1,099/3,396=0.32 1,166/3,008=0.39 1,026/3,296=0.31
ROE= net income/ total stockholder’s equity 1,099/(1,777)=-0.62 1,166/(1,513)=-0.77 1,026/(225)=-4.56
Earnings per share= net income/no. of common stocks 1,099/10,000=0.12 1,166/10,000=0.12 1,026/10,000=0.10

Ratio Analysis between PMI and Lorillard Companies

Current ratio for PMI the current ratio drops from 1.07:1 in 2010 to 0.97 in 2012. For Lorillard Company, the ratio drops from 2.08 in 2010 to 1.73 in 2012. The difference that can be perceived in these ratios depicts that Lorillard Company is placed at a better position to meet its short-term obligations, as opposed to PMI. The company (Lorillard) has at least 2 or more assets for each liability held.

Quick ratio for PMI, insignificantly, rises from 0.42:1 in 2010 to 0.45 in 2012. On the other hand, the ratio for Lorillard Company drops, steadily, from 1.86:1 in 2010 to 1.48:1 in 2012. This means that for Lorillard Company, each liability is at least offset by more than 1 asset. For this reason, Lorillard Company is placed at a better position to meet its short-term obligations without relying on the sale of its inventories.

Debt-to-Total Assets for PMI, insignificantly rises from 0.38:1 in 2010 to 0.47:1 in 2012. On the other hand, the ratio for Lorillard Company rises steadily from 0.53:1 in 2010 to 0.93 in 2012. For this reason, it is safe to indicate that Lorillard has a greater percentage of funds that have been provided by the creditors.

Inventory turnover ratio for PMI, insignificantly, drops from 22 in 2010 to 20 in 2012. On the other hand, the ratio for Lorillard Company significantly drops from 21.42 in 2010 to 16.15 in 2012. This means that Lorillard Company is able to translate its inventories to sales at a faster rate as opposed to PMI.

Fixed Assets turnover ratio for PMI rises from 10.4 in 2010 to 11.65 in 2012. On the other hand, the ratio for Lorillard Company drops from 16.43 in 2010 to 10.70 in 2012. This means that Lorillard Company uses fewer assets to affect vast levels of sales in comparison to PMI.

Accounts collection Period for PMI remains steady at 16 days in both 2010 and 2012. On the other hand, the ratio for Lorillard Company remains at 1 day throughout the period between 2010 and 2012. This means that Lorillard Company takes few days in order to collect cash for goods sold on credit. This also means that the company has more funds at its disposition that can be used for short-term expansion projects. This is not the case with PMI since it takes longer days to collect cash for goods sold on credit.

Gross profit margin ratio for PMI rises from 0.85 in 2010 to 0.86 in 2012. On the other hand, the ratio for Lorillard Company remains steady at 0.86 in the period between 2010 and 2012. This means that Lorillard Company’s operating margin is significant enough to cover operational expenses and thus, yield vast profits. This is not true with PMI since it has a significant lower ratio.

Net profit margin for PMI remains steady at 0.11 in the period between 2010 and 2012. On the other hand, the ratio for Lorillard is set at 0.17 for the financial periods between 2010 and 2012. For this case, it is safe to assume that Lorillard Company has huge after-tax profits per each dollar of sales in comparison to its immediate competitor PMI.

The ROA ratio for PMI rises from 0.21 in 2010 to 0.24 in 2012. On the other hand, for Lorillard, the ratio rises from 0.31 in 2010 to 0.32 in 2012. This means that Lorillard Company enjoys substantive after-tax profits for each dollar of asset spent.

The ROE ratio for PMI, significantly, drops from 1.9 in 2010 to -2.9 in 2012. On the other hand, for Lorillard Company, the ratio rises from -4.56 in 2010 to -0.62 in 2012. This means that Lorillard Company enjoys vast after-tax profits for each dollar of stockholder’s investment placed in the firm. This is not the case with PMI which continues to suffer losses in stockholder’s equity-base.

Balance Sheet: Capital Accounts

For PMI, the capital account is sub-divided into four subsections. These sections include the values of equity derived from the sales of common stock, additional paid-in capital; earnings reinvested in the business and the accumulated other comprehensive losses. On the other hand, the capital account for Lorillard Company has the four aforementioned items together with treasury stocks forming the additional item. It should be noted that for both of these companies the balances of the capital accounts depict deficits. They are also realistically presented given the fact that deficits and losses from the income statement are included.

For PMI, the book values are derived after accumulated depreciation is computed and the amount affected in the fixed assets values. The fixed assets book value for 2012 stands at $ 6,645M in 2012. On the other hand, the book value for Lorillard Company stands at $ 298M in 2012.

Other Assets

For both of these companies, there are other assets items which have been expounded in order to ascertain their treatments. These are good-will and other intangible assets. Both of these, for the two companies, are impaired annually. The impairment of these assets is conducted by comparing the fair values of each reporting unit to their immediate carrying values. In cases where the carrying value exceeds the fair value both goodwill and intangible assets are considered to be impaired. For non-amortizable assets, both of these companies use discounted cash flow models.

Deferred Taxes Account

For both of these companies, deferred tax assets and liabilities are treated as sub-sections of income taxes. These taxes are filled with the US federal jurisdiction, numerous states and city jurisdictions. They are also subjected to IRS examinations. These companies also recognize accrued interest and penalties in order to depict provisions of income taxes.

Non-Current Assets

Unlike PMI, Lorillard maintains a high liquidity position. This can be depicted by both the current and quick ratios. Lorillard Company maintains a higher asset to liability ratio. In 2012, the company depicts 1.73:1 ratio as opposed to 0.97:1 for PMI within the same year.

The debt-to equity ratio is slightly higher in Lorillard Company as opposed to PMI. This means that Lorillard enjoys significant funds from the creditors but is placed within the normal debt-range.

Income Statement: Profitability Ratios

Lorillard Company is considered to be the most profitable company between the two analyzed. These can be depicted by such ratios as gross profit margin, net profit margin, ROE and ROA ratios. In my opinion, CB&M can use more marketing platforms in order to catapult the levels of sales for Lorillard Company’s products. Accordingly, the CB&M can provide additional fund resources that can be used to catapult levels of sales and decrease short-term obligations in order for the company to engage in more short-term profitable projects.

Du Pont Analysis: PMI

Du Pont Analysis: Net Profit Margin* Asset Turnover*Financial Leverage For 2012: 0.11*2*(37,670/-3,154)=-2.63 For 2011: 0.11*2.2*(35,488/551)=-15.59 For 2010:

0.11*1.9*(35050/3,933)=-1.86

Du Pont Analysis: Lorillard Company

Du Pont Analysis: Net Profit Margin* Asset Turnover*Financial Leverage For 2012:

0.17*1.95*(3,396/(1,777)=-0.63

For 2011:

0.17*2.15*(3,008/1,513)=0.73

For 2010:

0.17*1.80(3,296/225)=-4.48

For Lorillard Company, the Du Pont analysis depicts that it can work better with the introduction of more debts. This is depicted by the higher financial leverage ratio as opposed to the PMI.

Executive Summary

The following are my recommendations for CB&M; first, CB&M should embark on loading debts for Lorillard Company, as opposed to PMI. This is because of the potential profitability of the company in respect to the industry averages. The company is placed at a fair position upon which it exhibits vast levels of sales.

Second, the financial leverage for Lorillard Company is positive and thus, can be offset by increasing a greater ratio of debts in order to aid with its day-to-day operations. This means that the company can use the additional funds to conduct short-term profitable business activities.

To sum up, it is fair to indicate that Lorillard Company is a better choice for putting more debts by CB&M as opposed to PMI that seems to be undergoing financial and profitability issues.

PMI Analysis

Ratios: Year 2012 Year 2011 Year 2010
Price/Book Value 83.64/(37,670-14,980)=0.004 78.48/(35,488-14,379)=0.004 58.53/(35,050-14,795)=0.003
Price/Earnings per Share 83.64/0.004=20,910 78.48/0.004=19,620 58.53/0.003=19,510
Price/EBITDA per Share 83.64/13,846=0.006 78.48/13,332=0.006 58.53/11,200=0.005

Lorillard Inc. Analysis

Ratios: Year 2012 Year 2011 Year 2010
Price/Book Value= stock price/total assets-intangible assets and liabilities 116.67/3,396=0.03 114/3,008=0.04 82.06/3,296=0.02
Price/Earnings per Share= market price/ earnings per share 116.67/0.12=972.25 114/0.12=950 82.06/0.10=820.6
Price/EBITDA per Share 116.67/1,882=0.06 114/1,895=0.06 82.06/1,729=0.05

Analysis

Price/Book Value ratio for PMI is unfavorable in comparison to the industry average. In 2012, the ratio for this company stands at 0.04 while that of Lorillard Inc. is placed at 0.03 within the same year. This means that an investor planning to invest in Lorillard Inc. is likely to gain more in case of company going bankrupt as opposed to PMI.

Price/Earnings per Share ratio for PMI stand at 20,910 in 2012 while that of Lorillard Inc. is placed at 972.25 within the same year. In comparison to the industry average of 18.4 X, it is safe to indicate that PMI stands at higher chance of rewarding stockholder’s with maximum level of wealth. However, it is not fully-proven that the ratio is capable to determine the aforementioned phenomenon.

Price/EBITDA per Share ratio for PMI, in 2012, stands at 0.006 while that of Lorillard Inc. is placed at 0.06 within the same year. These ratios when compared to the industry average of 17.4 X place Lorillard Inc. at a fairer position. This means that the company is able to earn higher capital returns as opposed to its competitor in the market.

Promising and Best Buy Business

In my opinion, I think that Lorillard Inc. is the most promising and better business between the two. This is because it has a potential of rewarding stockholder’s of their investments. This is depicted by the higher Price/EBITDA per Share that stands at 0.06 in 2012. These market value ratios depict a positive futuristic value.

Market Values for the Two Companies

In my opinion, I think that Lorillard Inc. current value stands at $, 3,400M while PMI’s value stands at $35,400M. Thus, my bid for PMI stands at a value between $ 35,000-to- 36,000M while for Lorillard Inc’s bid value can be placed at $ 3,400M-to-3,500M.