394  Valuation by Parts
EV/NOPAT multiple of 12.2 is lower than that of the branded-products unit. 
The devices business, with returns well above cost of capital and growth rates 
exceeding those of private-label products, is valued at $1,474 million and has 
a multiple of 14.5 times NOPAT. The organic-products business combines high 
returns with high growth, achieving a value of $3,440 million, second highest 
after branded products, but at a much higher implied multiple of 25.7 times 
NOPAT. With headquarters DCF at a negative $1,123 million and no impact 
on value from eliminations (see later in this chapter), the value of operations 
for ConsumerCo totals $10,107 million, corresponding to a weighted average 
multiple of 16.9 times NOPAT.
ConsumerCo’s customer-finance subsidiary provides loans for about a 
quarter of device revenues. It is valued at $150 million (net of $1,038 million 
of debt), using cash flow to equity discounted at its cost of equity of 10.5 per-
cent (see the next section). The cosmetics joint venture is valued using an en-
terprise DCF valuation, but only ConsumerCo’s 45 percent stake of the equity, 
valued at $609 million, is included in ConsumerCo’s value.
The combined total of ConsumerCo’s businesses, including the finance 
subsidiary, the cosmetics joint venture, and $250 million of excess cash, is 
$11,117 million. Subtracting $1,941 million of debt (excluding the portion al-
located to the finance subsidiary from the company’s total debt of $2,980 mil-
lion) leads to an equity value of $9,175 million.
ConsumerCo’s results illustrate why valuation by parts leads to better re-
sults. For example, even while all business units are at constant (but different) 
growth rates and returns on capital, ConsumerCo’s overall growth and return 
continue to change between 2020 and 2025 as the weight of organic products in 
the portfolio steadily increases. When the economics of business segments dif-
fer greatly, it becomes difficult via a purely top-down approach to understand 
historical patterns and to project future trajectories for a company’s returns 
and growth. If you had conducted a top-down DCF valuation of ConsumerCo 
as a single business at a constant 2020 ROIC of 13.9 percent and an ongoing 
growth rate of 5.5 percent, the resulting value would have been 10 percent too 
low. Also note how large the differences in multiples are across the businesses 
(from 12.2 to 25.7 times NOPAT) and how the aggregate multiple for the oper-
ating enterprise value matches none of the underlying businesses.
The equity value buildup in Exhibit 19.2 illustrates that branded and or-
ganic products generate the bulk of the company’s value. They also stand out 
for their market value added—the difference between DCF value and book 
value of invested capital. For each dollar of invested capital, value creation is 
the highest in these two business units.
A valuation-by-parts approach offers insights into the sources and drivers 
of a company’s value creation that a purely top-down view cannot reveal. 
Exhibit 19.3 shows how additional growth or ROIC affects the value of each of 
the business units. Given the high returns on capital for the organic-products 
unit, growth through additional investments in that business would create 

The Mechanics of Valuing by Parts  395
more value for the company than investments in other units. In contrast, the 
private-label unit creates the least amount of value, due to its low returns on 
capital. Improving returns is the best way to generate more value from this 
segment. To maximize value creation, ConsumerCo’s management should dif-
ferentiate priorities for growth and return across its segments, rather than set 
company-wide targets.
Many companies, ConsumerCo among them, struggle with such differen-
tiation. As the investment map in Exhibit 19.4 shows, ConsumerCo’s capital 
expenditures over the five years from 2015 to 2020 have been more in line 
with the size of each business than with their returns or growth. Investments 
EXHIBIT 19.2  ConsumerCo: Equity Value Buildup, January 2020
$ million
Market value
added (MVA)
Invested capital
5,188
1,128
1,474
3,440
1,123
–
10,107
150
609
250
11,117 1,941
9,175
Branded products
Private label
Devices
Organic products
Corporate center
Eliminations
Total operations
Customer finance
Cosmetics joint venture
Excess cash
Gross enterprise value
Debt
Equity value
900
563
1,600
488
EXHIBIT 19.3  ConsumerCo: How Changes in ROIC and Growth Affect Value
Change in DCF value of operations, %
From 1% increase in growth
From 1% increase in ROIC
Branded products
  5.4
  5.9
Private label
  1.7
  16
Devices
  4.7
  7.7
Organic products
  6.8
  4.5