In this workout, we're going to look at some of the parts technique of valuing companies. We're going to use John Deere as our case company. This is a well-known industrial manufacturer of agricultural and other equipment like trailers, tractors, that kind of thing. You can see we've been given two ratios. One is an LTM EBIT ratio, and it will allow us to get the EV for the equipment operations segment of the business. This is an operational segment. It's selling equipment. It's acting like a regular company, and so we're going to evaluate using an operational measure EV to EBIT.

The second multiple we've been given is a PE ratio for the financial services business. This is using more bank valuation techniques. John Deere is extending a lot of credit to its customers because its equipment is very expensive and it's doing so, so regularly that it's giving us information about the financial services arm.

The financial services arm is acting more like a bank, and so bank valuation techniques would use P/E ratios because the idea of operations gets quite tricky when your operations includes liabilities and other financial items.

We've also been given the diluted shares outstanding. We have a set of financial statements and then handily the key items from the financial statements have been put down here, and so we can manipulate this data a bit more easily than having to reach into the image or PDF that's represented above. So let's get started. We are going to first value the equipment arm of the business. We're going to calculate EBIT, so we can unify that with our ratio up above. And so we're going to multiply the EBIT by the 14 times valuation multiple that's been suggested. What that suggests is that the EV or enterprise value of the equipment segment is about $52 billion.

Now, eventually we'd like a share price, and so we need to cross the bridge to get from EV down to equity.

I tend to always visualize the EV bridge, and the bottom left would be the EV. The top left would have non-core assets such as cash financing, receivables, things like that.

Then the top right would have debt and other financial debt likes, which we can see down here. And then the bottom right would be equity value. So what that means is our starting point for the equity would be enterprise value. We would then add on any non-core assets, which would be all the way down here, including cash, and we would deduct any claims on the EV that would reduce the value to the equity holders.

We can see that actually the EV and the equity for John Deere are fairly similar because of the way that the bridge items work, but in other businesses they can be very different. And so crossing the bridge is very important.

We've now got the equity value of the equipment arm of the business, and our next job is to do the same thing for the financial services business. Now, note that there's no bridge here, and the reason behind that is because we're going to take the net income, we're going to multiply it by the PE ratio that's been suggested as appropriate for the financial services arm. And note that a PE ratio price over earnings, the price that it is mentioning there is the price of equity. So when I hit enter here, we've effectively created the market capitalization of the equity of the financial services arm, and this makes it compatible with our row 67. So what we can do is we can add the two together to find the total value of equity within John Deere, and then we can go down to a single shares worth of equity. And we can say our prediction is on a sum of the part basis, having valued both arms of the business using appropriate ratios and techniques. We think a share of John Deere would be $170.