Valuation, 7th Edition

19Valuation by Parts

Up to this point, our analysis has focused on single-business companies. But many large companies have multiple business units, each competing in segments with different economic characteristics. For instance, Anglo-Dutch Unilever competes in food and refreshments, personal products, and home-care products. Even so-called pure-play companies, such as Vodafone (mobile telecommunication services) and Amazon (online retail), often have a wide variety of underlying geographical and category segments. This is not just the case for large companies: consider the local bicycle shop that also has an online sales channel.

If the economics of a company’s segments are different, you will generate more insights by valuing each segment and adding them up to estimate the value of the entire company. Trying to value the entire company as a single enterprise will not provide much understanding, and your final valuation may be way off the mark. Consider a simple case where a faster-growing segment has lower returns on capital than a slower-growing segment. If both segments maintain their return on invested capital (ROIC), the corporate ROIC would decline as the weights of the different segments change, while the corporate growth rate would steadily increase.

Valuing by parts generates better valuation estimates and deeper insights into where and how the company is generating value. That is why it is standard practice in industry-leading companies and among sophisticated ...