Financial Detective Essay
Company A is Johnson & Johnson, which is a diversified manufacturer of prescription pharmaceuticals, health and beauty aids, over-the-counter drugs, and medical devices. Company B is Pfizer Inc., which develops, manufactures, and markets patented pharmaceuticals such as Liptor and Celebrex. The most significant strategic differences between the two firms lie in their product mix and their customer focus. J&J sells most of its products directly to the consumer while Pfizer sells exclusively to doctors and institutions.
Firm B has intangibles worth more than twice as much as firm A, which may reflect firm’s B’s higher investment in R&D. Firm B may also have higher intangibles due to their ownership of patents and its investments in licensing arrangements.
Firm B’s gross margin is more than 12% higher than company A’s, which reflects the higher input costs for company A’s medical diagnostics and devices product segment.
Company A has a far quicker inventory turnover than company B. Company B sells almost exclusively to institutions and pharmacies, which usually take longer to exhaust their supplies compared to company A, who markets its consumer products to retailers, which have a higher turnover orientations.
Many of company A’s and B’s products are branded consumer products that command a price premium. However, company B’s premium is higher, reflecting the benefits of patent protection on prescription pharmaceuticals, and the additional returns needed to support company B’s large R&D efforts.
Company C is Anheuser-Busch Companies Inc., which is a producer and marketer of a number of mass-market beers such as Budweiser, Michelob, and Busch. Company D is the Boston Beer Company, which is the seller of the popular Sam Adams line of beers. Boston beer’s products are part of a microbrew.
Company D’s proportion of cash and cash equivalents, which is extremely higher than company C’s show their conservative approach to its financial management.
Company C shows a relatively high level of PP&E, which is consistent with its status as a major brewery. Company D has much lower net fixed assets since much of their operations are outsourced. Company C also has higher fixed assets due to its other holdings such as theme parks.
Company D has higher gross profit, consistent with the premium pricing of its specialty brews versus the mass-marketing approach that was taken by company C. However, company C’s net profit margin is almost three times greater than company D’s. This may reflect the economies of scale that company C can achieve through its large size.
Company D’s current assets to current liabilities ratio is three times greater than company C’s, whose current ratio is less than one. That is illustrating a careful financial approach.
The commitment to financially conservative policies is shown with company D’s relatively low level of debt.
Company C’s mass-market approach shows a significantly higher inventory turnover than company D’s turnover.
Company D’s asset turnover is much higher due to the outsourcing. Company C’s lower turnover is consistent with a firm that owns its manufacturing facilities as well as asset-intensive theme parks.
Company E is Dell Inc., a worldwide manufacturer and direct marketer of built-to-order computers and related equipment. Company F is Apple Computer Inc., a manufacturer of a highly differentiated group of personal computers, software, and consumer electronics. This is motivated by the differentiation where company E seeks to sell a relatively high volume of lower-margin products, while company F attempts to sell an adequate volume of higher margin products.
The computer and software industry is extremely volatile, which company F has experienced. Company F has extremely large holdings of cash and cash equivalents, which may represent their efforts to insure the company against any future difficulties.
Company E has a higher percentage of A/P, which may reflect a higher degree of supplier financing.
Company F has a lower COGS percentage, which reflects both its premium pricing and the lower cost associated with software production. Company E’s COGS is higher due to its strategy of making money on volume rather than from individual product margins.
Company F has higher gross profit than company E due to its premium pricing. However, Company E’s net profit margin is almost twice as large as company F’s, which reflects their low-cost focus.
Company E has low cost mail-order strategy, which leads to a lower SG&A percentage compared to company F’s who goes with a more unique retail store concept.
Company F has a higher receivables turnover, which reflects the fast payments made by consumers in the form of credit card purchasers.
Company E’s asset turnover is more than twice as large as company F’s. This might reflect E’s strategy as an assembler of components that have been manufactured by its supplier.
Books and Music:
Company G is Amazon.com, the online retailer of books and music plus a variety of other consumer goods. Company H is Barnes & Noble, Inc., the largest bookseller in the United States. The main difference between the two is that one being an established, traditional retailer and the other being a relatively new online business.
Company G has more than half of its assets in cash and cash equivalents, which could be explained by its carefulness in a volatile online retail business.
Company H has significantly higher proportion of inventory than company G because they have to maintain stocks of books, CDs, and videos at all of its stores, whereas company G can keep limited inventory at its distribution centers.
Company G obviously has a significantly lower net fixed asset due to being an online retailer compared to having multiple stores to sell its merchandise.
More than half of company G’s percentage of total liabilities and equity is comprised of long-term debt. This is most likely due to its issues of being able to raise capital after the dot-com bust environment.
Company G’s beta is more than three times higher than company H’s, which shows a relatively higher risk of company G. Company G just recently started to show positive net income.
Company G is able to keep a higher inventory turnover since they don’t have to sit with a lot of inventory on hand at all times compared to company H who has to store its inventory in their store, which lowers their turnover.
Company H has a regular discount strategy, which could explain their lower net profit margin.
Company I is the International Paper Company, a large, vertically integrated paper products manufacturer. Company J is the Wausau paper Paper Corporation, a small, specialty-papers operation. The distinctions between the firms arise primarily from their scale and scope.
Company J carries more than twice the rate of company I, which may be the case due to its smaller size it requires the firm to carry a higher proportion of inventory in order to satisfy its demanding customers.
Company I has a material lower percentage of COGS than company J, even though the raw materials are essentially the same. This illustrates the benefits of Company I having its own forests and lumber operations and their ability to negotiate lower volume-prices.
Company I’s SG&A expenses are higher than J’s, which probably reflect the higher costs associated with being a large company.
Hardware and Tools:
Company K is Black and Decker Corporation, which manufactures and markets a broad range of power tools. Company L is Snap-on Inc., also a manufacturer of tools and other hardware, but the company is known for its high quality merchandise and for its direct sales to professional mechanics and commercial technicians.
Company L has a higher percentage of receivables compared to K’s. This result occurs because K markets directly to professional end-users and provides financing, which may cause delays in repayment. On the other hand, company L primarily sells its merchandise to large retailers, which may have more regular payment schedules.
Company K sells lower-priced products intended for the consumer market, whereas company L markets higher margin precision tools for the commercial customer. Therefore, Company L’s gross profit percentage is measurable higher than K’s.
Company L has a higher SG&A expenses, which corresponds to the costs associated with maintaining its large direct sales force.
Company L’s payout ratio is more than four-and-a-half times greater than K’s, which may suggest its need to maintain a high rate of reinvestment to remain competitive.
Company M is Wal-Mart Stores Inc., which is well known for the breadth of its merchandise and its low price strategy. Company N is Target Corporation, which also is a discount retailer, however target appeals to its customers’ more upscale tastes.
Company N has much higher receivables than M, reflecting N’s substantial credit activities.
Company M has higher inventory levels relative to N, which may reflect the company’s commitment to providing a vast selection of goods.
Company N has relatively lower COGS percentage, reflecting its fuller price for designer-made products. M offers low prices, which would result in a higher COGS percentage.
Company M has a higher receivable turnover due to its lower use of credit sales.
Company O is Lee Enterprises, the owner of a number of small newspapers in the Midwest. Company P is New York Times Company, and their strategic difference between the two entities is along the centralization/decentralization dimension. Company P has a centralized strategic approach while company O has a decentralized approach.
Company P, who has a centralized approach, has a significantly higher level of net fixed assets than O.
K bears some of the features of a decentralized operation, since its intangibles comprise almost 77% of total assets, which suggests the existence of substantial goodwill.
Company P’s level of COGS is lower than O’s, which suggests that as a larger centralized company, P may be in a better position to negotiate for volume discounts than O.
Although O is decentralized, the case shows that they have slightly lower SG&A expenses than P. One example to this could be that high prices may be masking a relatively high SG&A expense.
Company O’s P/E ratio is higher than P’s, which may indicate the expectations of growth for O. As the dominant player on a larger scale, P may be unable to grow through strategic acquisition.
O’s net profit margin is higher, which may reflect the local monopolies, or at least less intense competition outside of the major metropolitan newspaper markets.