I've learnt about DCF Valuation, but I've heard about the Sum-of-Parts Method, was wondering if anyone could explain the difference between the two?

Hi Anon!

Yes the two forms of valuation are different. SOTP values different business segments, units or subsidiaries, with the end goal of reaching a valuation of the sum of the different business parts. Incorporated into this anlaysis is also the idea that the sum of the business units, are bigger than their individual components due to synergies (basically the 1+1=3 concept).

DCF on the other hand, aims to perform valuation through free cashflow estimates and discouting them back to the segments present value. You could peform DCF as one of the valuation techniques for SOTP, with valuation for the other business units being that of multiples analysis or asset-based valuation.

SOTP is usually done for businesses with distinct business segments such as conglomerates like General Electirc. However, the increase in number of inputs and estimates for the different business segments can be cause your valuation to become more misleading. Overlaps between business segments can also make your valuation more complicated.