Financial Analysis

and Valuation
Final Assignment

Picavet Valentin
Student’s number : 73161
 About Philip Morris International
Philip Morris International Inc. is a Virginia holding company incorporated in 1987.
They are a leading international tobacco company engaged in the manufacture and
sale of cigarettes, as well as smoke-free products, associated electronic devices and
accessories, and other nicotine-containing products in markets outside the United
States of America.
Their goal is to ultimately replace cigarettes with smoke-free products to the benefit
of adults who would otherwise continue to smoke, society, the company and its
shareholders.
 Phase 1: Analysis of the Company and the
Business
The unprecedented headwinds of the COVID-19 pandemic has caused a significant economic
disruption. This crisis has had a particular impact on Philip Morris’ operations and financial results.
Indeed, during the second quarter of 2020 and throughout the 2nd half of the year, net revenues of
$28.7 billion for the year ended December 31, 2020, decreased by 3.7%, from the comparable 2019
amount. This reduction is primarily due to unfavorable combustible tobacco volume/mix – which
was exacerbated by pandemic-related headwinds – partly offset by higher HTU shipment volume
and favorable combustible tobacco pricing.
Moreover, Total cigarette and heated tobacco unit (HTU) shipment volume of 704.6 billion units
decreased by 8.1% in 2020, reflecting lower cigarette volume, mainly due to industry-wide COVID-
related disruption, particularly in the second quarter of 2020.
• Financing activities: the $0.4 billion increase in net cash used was due primarily to higher
payments to noncontrolling interests and higher dividends paid, partially offset by debt activity.

• Investing activities: the $0.7 billion decrease in net cash used in investing activities was primarily
due to the reduction of cash in 2019 resulting from the deconsolidation of RBH and lower capital
expenditures, partially offset by higher cash collateral posted to secure derivatives designated as
net investment hedges of Euro assets principally related to changes in exchange rates between
the Euro and the U.S. dollar.

• Operating activities: the $0.2 billion increase in net cash providing by operating activities was
primarily due to higher net earnings partially offset by higher working capital requirements of
$0.5 billion and higher cash payments in 2020 for asset impairment and exit costs.
 Philip Morris ratio’s analysis
In order to analyze the financial performance of Philip Morris, I will
compare different ratios to the average ratio of companies of the same
sector:
• Quick ratio: shows how current liabilities are covered by cash
• Working capital ratio: shows the company’s ability to pay its current
liabilities with its current assets
• Price-earnings ratio: determine relative value of a company’s shares
• Return on equity: shows how profitable common shareholders’
capital is in the business they invest it in
 Profitability Ratios

The different profitability ratios show us that Philip Morris is quite efficient in turning dollar of
sales into profits. Moreover, the operating margin is quite high. In addition, the return on Equity
is not that good as it is negative (in comparison with the average ratios of the industry which
are positive).
 Leverage ratios

We can see that Philip Morris has a huge ability to meet its debt obligations based on its
current income as its Time interest earned ratio is relatively high. Moreover, Philip Morris’
debt to equity ratio is lower than 1 which means the company is quite risky (in comparison
with the average ratio for the sector which is approximately 3). Indeed, the D/E ratio is
neagtive which means that the company has more liabilities than assets i.e the company is
extremely risky.
 Liquidity ratios

Philip Morris has a low Quick ratio which means that the company can not get rid of its current
liabilities instantively. Moreover, the Working capital ratio is inferior than 1 which means that
Philip Morris can have liquidity problems in the future. Finally, the Current ratio shows that the
company can cover its current liabilities 1.10 times which is quite good.
 Efficiency ratios

By looking at the Efficiency ratios, we can conclude that one of the biggest weaknesses of
Philip Morris lies in its ability to generate sales from its employed assets. The Receivables
turnover isfar from the average ratios of the sector which is 67.
Investment ratios
 Phase 2: Valuing the company using
Discounted Cash Flow Valuation
• Estimating the cost of equity

• Estimating the weighted average cost of capital (WACC)

• Estimating the Equity value using a discounted cash flow based onf
FCFF (Free cash flow to the firm)
Estimation of the Cost of Equity
Estimate the WACC
Estimate the WACC
 Estimate the Equity value using a Discounted
cash flow based on FCFF

• To estimate the Equity value, I looked at the growth of Philip Morris

on Yahoo finance and I saw that the company was constantly growin
from March 2008 with some downwards that’s why I chose a growth
period length of 3 years.

• By using the discounted cash flow based on FCFF, I obtain an equity

value for Philip Morris of $156,824,354,073.55 and a share value of
$100.69.
 Phase 3: Valuing the company using
Comparable Companies Analysis

• Define an appropriate set of comparable companies

• Estimate the equity value using at least one equity side multiples
• Estimate the equity value using at least one asset side multiples
 Define an appropriate set of comparable
companies
To find my set of comparable companies, I looked at the 10K-form and
this is what I found when Philip Morris talks about its competitors:
« Competitors include three large international tobacco companies, new
market entrants, particularly with respect to innovative products, several
regional and local tobacco companies and, in some instances, state-
owned tobacco enterprises, principally in Algeria, Egypt, the PRC, Taiwan,
Thailand and Vietnam"
 Define an appropriate set of comparable
companies
I encountered some problems while deciding which company to choose. Indeed, I wanted to use
Reynolds American, but I couldn’t find its 10-K report. Moreover, I had to choose public companies.
That’s why I decided to go with the following companies:
 Estimate the equity value using the P/E ratio
I compute the P/E ratio for Philip Morris and its competitors, and I get:
 Estimate the equity value using the P/E ratio
Then, I computed the number of diluted shares of Philip Morris, and I
obtain 1,557,451,856 shares. Thus, I could estimate Philip Morris’
equity value and I got:
 Estimate the equity value using at least one
asset side multiples
Firstly, I had to obtain the fully diluted shares for each competitor.
Secondly, thanks to that I could compute the Entreprise Value and
thereafter I got the 3 different multiples for each competitor, which are
presented in the following table:
 Estimate the equity value using at least one
asset side multiples
Lastly, I was able to estimate the equity value of Philip Morris using
different multiples:
 Phase 4: Conclusion/ Recommendation

• Compare all the equity estimates you obtained with the various
methods with the current market capitalization of the company
• Make comments about possible differences in equity estimates
across the methods
• Make a recommendation (buy, neutral,sell)
 Compare all the equity estimates
When comparing the various methods to obtain equity value with the
current market capitalization of Philip Morris I get the following table:
Comments about possible differences in equity
estimates across the methods
➢ Most of the equity estimates are relatively close to the current Market capitalization of Philip
Morris. Still, there are differences:
• The Comparable Companies analysis is relatively easy to use and gives us a quite precise
estimation of our equity. Meanwhile, we can observe that some values of our range are far from
the current market capitalization of Philip Morris. For example, the lower bound of the EV/Sales
multiple range is $93B below the current market capitalization and the upper bond of this same
multiple range is $233B higher than the current market capitalization. Those differencies can be
due to the fact that the competitors I have chosen may be not the best ones.
• The equity estimate using the DCF method is $16B higher than Philip Morris’ current market
capitalization. This can be due to the fact that I made assumptions which might not be all true or
some inputs might not be the right ones.
 Make a recommendation
• First of all, due to the COVID-19 pandemic and the increase in taxes the stock price of Philip
Morris had fallen to $70 in mid 2019. However, the company recovered from this as the current
stock price is $94.
• Moreover, despite the sector, Philip Morris does not seem to outperform the market as its P/E
ratio is not the highest of its sector. However, it increased a lot from 2019 to 2020 and might
continue to grow in the future.
• In addition, the ROE of the company is negative and inferior to its peers, this means that the
company incurred a loss and that a shareholder that wants to invest in the sector would have
more interest to invest in a company with a larger ROE and P/E ratio as they are losing rather than
gaining value by investing in Philip Morris according to its ROE.
• Furthermore, the company is seen as a risky company so selling the stock might be a good option.
To conclude, even if the company seems to be recovering from the COVID-19 crisis, the sector is too
risky right now to invest in the company, so I recommend not to buy or to sell Philip Morris’ stock.