In the world of corporate spinoffs, akin to hidden treasures waiting to be unearthed, a rare gem occasionally surfaces—one that demands recognition for its enduring investment potential. Enter Veralto, the most recent spinoff from the esteemed Danaher Corporation. This stock not only warrants attention but also compels serious consideration for inclusion in any discerning investor’s portfolio.

For those who followed my prior assessment of Veralto (VLTO), you are privy to my timely acquisition of shares post-spinoff, capitalizing on its ascent from the early $70s. My affinity for the Rales brothers is no secret, and the entity of Danaher (DHR) stands as yet another compelling investment proposition worthy of exploration. For the unacquainted, let me shed light on this dynamic organization and elucidate why it merits a place in your investment repertoire.

The Danaher Legacy

Boasting a preeminent position in the realms of science and technology, Danaher (DHR) owes its success largely to the strategic vision and innovative stewardship of Steven and Mitchell Rales. Their transformative approach involved astutely acquiring undervalued assets, a strategy that took root in the early 1980s. Central to their modus operandi was the implementation of the Danaher Business System (DBS), drawing inspiration from the Japanese Kaizen model. Emphasizing lean manufacturing, profitability, and growth, this blueprint propelled DHR from a modest conglomerate to a global juggernaut spanning diverse sectors. Prioritizing long-term value and expansion over short-sighted gains, the Rales brothers streamlined and enhanced each acquisition, elevating DHR’s market standing and endowing it with a reputation for excellence. Their investment in spinoffs, including Veralto (VLTO), underscores the wisdom in tracking their financial moves.

The Veralto Venture

Emanating from its parent entity in October 2023, Veralto (VLTO) emerges as a global pacesetter in crucial technologies dedicated to fortifying the world’s indispensable resources. With a mission centered on effecting a lasting positive influence by addressing pivotal challenges related to water and product quality, Veralto embodies leadership in two pivotal domains: water quality and product quality innovation.

Championing Water Quality:

Veralto shines in the realm of municipal and wastewater treatment technologies, seeking to enhance water treatment protocols for communities and urban areas. By ensuring efficient purification and proficient wastewater management, Veralto plays a critical role in safeguarding public health and environmental sustenance. Additionally, the company’s efforts extend to safeguarding the quality of lakes, rivers, and other natural water reservoirs through the deployment of solutions to monitor, enhance, and regulate water conditions, thus combating pollution and fostering ecosystem restoration.

Employing cutting-edge technological interventions to address issues such as water pollution, inefficient resource management, and other environmental hazards, Veralto remains steadfast in monitoring the state of our vast oceans and watersheds, which serve as intricate ecosystems meriting vigilant protection.

Eminence in Product Quality and Innovation:

In the domain of product quality, Veralto plays a pivotal role in the global supply chain by ensuring authenticity and safety across the spectrum:

Food Safety: Veralto spearheads efforts in safeguarding against contamination and guaranteeing the safety of food products from farm to table. Leveraging technology to monitor the entire food production process, Veralto sets the standard for food industry safety. In the pharmaceutical sector, Veralto introduces solutions to authenticate medications, combating the proliferation of counterfeit drugs and safeguarding public health by ensuring the availability of genuine, safe pharmaceuticals.

Future Projections

With approximately 55% of its revenue stemming from recurring sources and favorable margins, Veralto (VLTO) is primed to leverage its dominance in high-growth sectors within a fragmented industry landscape. Bolstered by its unique product portfolio, Veralto stands poised to fortify its position and engender synergies as an independent entity. Furthermore, factors such as new product development, escalating concerns over water quality, ESG (Environmental, Social, and Governance) initiatives, and stringent regulatory mandates are poised to serve as long-term growth catalysts, with a favorable secular tailwind potentially amplifying their impact.

Recent Financial Performance

Veralto recently disclosed its earnings on February 6th, projecting a stable outlook for Q1 FY24E amid rising costs. However, management envisages a gradual recovery, buoyed by an anticipated resurgence in demand during H2 FY24, particularly in the Product Quality and Innovation (PQI) segment. Firm in their commitment to achieving modest single-digit growth, preserving healthy margins, and upholding low leverage, Veralto is actively scouting for merger and acquisition opportunities to enhance its portfolio via strategic capital infusion. Positioned for sustained growth, Veralto holds promise as a potent contender for long-term capital appreciation and potential future spinoff of its two divisions, potentially catalyzing a stock price doubling within one to two years.

• Within its Water Quality segment, Veralto (VLTO) recorded a 3.4% growth to $782 million in 4QFY23 from $756 million in 4QFY22, with core sales climbing by 2.1%. Notably, full-year 2023 witnessed a rise to $3,039 million from $2,887 million in FY22, signaling a 5.3% increase, accompanied by a 5.1% surge in core sales. While facing ongoing challenges in China, the management remains sanguine about a prospective rebound, discerning signs of a market bottom. In contrast, North America and Europe exhibit unwavering demand across various industries.
• The Product Quality Innovation (PQI) sector observed a 2.9% uptick to $506 million in 4QFY23 from $492 million in 4QFY22, with core sales expanding by 1.1%. However, the full-year figures for 2023 remained relatively stable at $1,982 million compared to $1,983 million in FY22, reflecting a marginal decrease in core sales by 1.1%. Challenges loom in the consumer packaging domain, yet advancements in marking & coding effectively offset declines in packaging & color segments.

Notably, as of 4QFY23, Veralto holds a total debt of ~$2.6 billion and a cash balance of $762 million, translating into a net debt of $1.9 billion, coupled with an adjusted EBITDA of $1.2 billion. With a net leverage hovering around 1.54x, the organization’s robust free cash flow conversion exceeding 100% stands poised to buttress its balance sheet and curtail leverage further.

For Q1 FY24E, management forecasts flat core sales growth alongside an adjusted operating margin ranging between 23.0% and 23.5%. Looking ahead to the full year 2024E, Veralto anticipates low-single-digit (LSD) growth in its core operations, coupled with a margin enhancement of 50–75 bps. This margin expansion accounts for additional standalone costs and other corporate expenditures amounting to ~$100 million. Simultaneously, a free cash flow conversion of approximately 100% is on the horizon.

Despite the stable outlook for Q1 FY24E, Veralto anticipates an incremental upturn following escalating costs. Bolstered by the anticipated resurgence in demand during H2FY24, particularly within the Product Quality Innovation (PQI) landscape, Veralto’s path to achieving modest single-digit growth, while upholding robust margins and minimal leverage, appears promising. Furthermore, the organization’s pursuit of mergers and acquisitions heralds a viable avenue for enriching its portfolio strategically and fostering value creation. Anchored by these strategic pillars, Veralto emerges as a compelling investment proposition for discerning investors seeking enduring growth trajectories and strategic expansion opportunities.