An Ode to Danaher

Delving into the realms of spinoff companies is akin to searching for hidden treasures; among them emerges a standout gem that beckons long-term investors with its promise of growth. Veralto, the latest spinoff from Danaher Corporation, is precisely such an opportunity. It stands out not only as a deserving addition to your investment portfolio but also as a compelling compulsion that demands consideration.

If you are well-acquainted with my previous analysis of VLTO, you’ll know that I ventured into acquiring shares post-spinoff, profiting from its ascent from the early $70 range. My admiration for the Rales brothers is no secret; furthermore, Danaher Corporation (DHR) stands tall as another investment option worthy of exploration. For those uninitiated with DHR, let me shed some light on this dynamic company and why it merits your attention.

The Danaher Distinction

Riding on the crest of scientific and technological innovation, Danaher (DHR) has burgeoned into a global powerhouse under the strategic acumen and innovative stewardship of Steven and Mitchell Rales. Their transformative journey began in the early 1980s, strategically acquiring undervalued assets and unleashing their latent potential through operational efficiency and the DHR Business System (DBS).

Embracing a philosophy modeled after the Japanese Kaizen approach, DHR prioritized lean manufacturing, profitability, and sustainable growth. This strategic framework catapulted the company from a modest conglomerate to a revered global entity across diverse sectors. The Rales brothers’ steadfast commitment to long-term value creation and growth discernibly distinguishes DHR as a champion in its domain. Notably, they have orchestrated multiple spinoffs, indicative of their astute investment choices, with VLTO being their latest financial interest.

The Veralto Vision

Emerged in October 2023, Veralto (VLTO) stands as a global luminary in essential technologies dedicated to safeguarding the sanctity of the world’s precious resources. Driven by a mission to leave a lasting positive imprint, Veralto focuses on tackling pressing challenges concerning water and product quality. Their commitment extends to fostering advancements in water quality, product quality, and overall innovation.

Diving into Water Quality Initiatives

Within the water quality domain, Veralto pioneers state-of-the-art technologies for municipal and wastewater treatment, aiming to enhance water treatment processes for communities. By ensuring efficient purification and effective wastewater management, Veralto not only supports public health but also contributes to environmental preservation by safeguarding natural bodies of water.

Additionally, Veralto’s emphasis on monitoring oceans and watersheds, vast ecosystems in their own right, underscores their application of cutting-edge solutions to combat water contamination and address environmental threats.

Pioneering Quality and Innovation in Products

In the product realm, Veralto plays a pivotal role in the global supply chain by championing authenticity and safety checks across various sectors:

Enhancing Food Safety: With a paramount focus on preventing contamination, Veralto takes the lead in ensuring the safety of food products from farm to table. By leveraging technology to oversee the entire food production process, Veralto maintains food integrity. In the pharmaceutical sphere, Veralto introduces authentication solutions to combat counterfeit medications, safeguarding public health by ensuring the availability of genuine and safe pharmaceuticals.

The Promising Outlook Ahead

With nearly 55% of its revenue steming from recurrent sources and boasting favorable margins, Veralto is poised to leverage its expertise in burgeoning sectors amid a dynamic industry landscape. Endowed with distinctive products, Veralto is well-equipped to fortify its market position and unearth synergies as an independent entity.

As Veralto embarks on new product developments, confronts escalating water quality concerns, and champions ESG initiatives alongside stringent regulatory standards, the runway for long-term growth appears increasingly favorable, underpinned by a positive secular tailwind.

A Glimpse into Recent Earnings

Veralto recently disclosed its earnings on February 6th this year. While projecting a stable outlook for Q1 FY24E in light of rising costs, management anticipates a gradual resurgence in demand in H2 FY24, particularly within the Product Quality and Innovation (PQI) segment. The company remains steadfast in its pursuit of fostering low single-digit growth, preserving healthy margins, and maintaining lean leverage.

• In the Water Quality segment, Veralto witnessed a 3.4% increase to $782 million in 4QFY23 from $756 million in 4QFY22, with core sales surging by 2.1%. The full-year 2023 saw revenues climb to $3,039 million from $2,887 million in FY22, reflecting a 5.3% uptick, with core sales burgeoning by 5.1%. Although China faces ongoing challenges, North America and Europe exhibit consistent demand trends across industries.
• The Product Quality Innovation (PQI) segment noted a 2.9% upswing to $506 million in 4QFY23 from $492 million in 4QFY22, with core sales expanding by 1.1%. Conversely, the overall 2023 figures remained relatively stable at $1,982 million compared to $1,983 million in FY22, with core sales dipping by 1.1%. While PQI confronts hurdles in consumer packaging demand, advancements in marking & coding counterbalance declines in packaging & color.

As of 4QFY23, Veralto’s total debt hovers around ~$2.6 billion, with a cash balance of $762 million, resulting in a net debt of $1.9 billion. With an adjusted EBITDA of $1.2 billion, the net leverage approximates 1.54x. Displaying robust free cash flow conversion exceeding 100%, Veralto anticipates a fortified balance sheet and reduced leverage.

For Q1 FY24E, management guides flat core sales growth with an adjusted operating margin ranging from 23.0% to 23.5%. Anticipating low-single-digit growth from the core business for the full year 2024E, Veralto aims at enhancing the operating margin by 50–75 bps. This margin improvement accounts for incremental standalone costs and other corporate expenses totaling ~$100 million. Simultaneously, the company projects a free cash flow conversion of ~100%.

Despite forecasting a steady outlook for Q1 FY24E amidst escalating costs, a gradual uptick is on the horizon. Firm in its resolve to achieve low single-digit growth, especially with the expected demand resurgence in H2 FY24 for PQI, while upholding robust margins and lean leverage, Veralto’s proactive pursuit of mergers and acquisitions signals potential avenues for strategic portfolio enrichment and value accretion. This strategic stance positions Veralto as a compelling investment opportunity for those seeking sustained growth and strategic investment prospects.

On the date of publication, Jim Osman held positions in: VLTO, DHR. All the information and data presented in this article are intended solely for informational purposes. For further details, please refer to the Barchart Disclosure Policy.

The expressed thoughts and opinions in this piece reflect the views of the author and may not necessarily mirror those of Nasdaq, Inc.