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What is SOTP valuation?

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What is SOTP valuation?

Sum of the parts valuation (SOTP) is extremely important when it comes to valuing companies with distinct businesses within it's portfolio.

A good example of this is Google which we discuss in the video below. 👇👇👇

Whilst the traditional DCF can still be used to value Google, there are some companies where a straight up DCF just doesn't cut the mustard.

BMW being the case in point. 😲

it's autos business needs to be valued 💹 separately using a traditional DCF.

BMW's financial services division needs to be valued using Price to Book comparables.

This is because a traditional DCF cannot be used to value financial services or banking businesses.

Also important to note is that the debt borrowed by it's financial services division to fund customers finances to buy a car, tilts the cap structure significantly on the combined DCF to almost 70-30 Debt to Equity ratio.

This renders the classic DCF unstable and unreliable as small changes to inputs in the companies WACC or growth rates results in outsized changes to the underlying valuation of BMW.

We discuss this in more detail on our 8-week course.

Discussions like these are exactly the reason why our students stand out of the crowd when it comes to those dreaded technical interviews at investment banks.


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