Veralto (VLTO)

Water analytics and treatment company Veralto (NYSE:VLTO) met Wall Street’s revenue expectations in Q3 CY2025, with sales up 6.8% year on year to $1.40 billion. On the other hand, next quarter’s revenue guidance of $1.38 billion was less impressive, coming in 1.4% below analysts’ estimates. Its non-GAAP profit of $0.99 per share was 4.6% above analysts’ consensus estimates.

Company Overview

Spun off from Danaher in 2023, Veralto (NYSE:VLTO) provides water analytics and treatment solutions.

Many air and water services are statutorily mandated or non-discretionary. This means recurring revenues are often earned through contracts, making for more predictable top-line trends. Additionally, there has been an increasing focus on emissions and water conservation over the last decade, driving innovation in the sector and demand for new services. On the other hand, air and water services companies are at the whim of economic cycles. Interest rates, for example, can greatly impact manufacturing or industrial processes that drive incremental demand for these companies’ offerings.

No sizeable company offers all of the products and services Veralto offers, but some competing in intersecting areas include Rentokil Initial (NYSE:RTO), GFL Environmental (NYSE:GFL), and Rollins (NYSE:ROL).

A company’s long-term sales performance can indicate its overall quality. Any business can have short-term success, but a top-tier one grows for years. Over the last four years, Veralto grew its sales at a sluggish 4.4% compounded annual growth rate. This was below our standard for the industrials sector and is a poor baseline for our analysis.

Long-term growth is the most important, but within industrials, a stretched historical view may miss new industry trends or demand cycles. Veralto’s annualized revenue growth of 4.6% over the last two years aligns with its four-year trend, suggesting its demand was consistently weak.

This quarter, Veralto grew its revenue by 6.8% year on year, and its $1.40 billion of revenue was in line with Wall Street’s estimates. Company management is currently guiding for a 2.5% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 5% over the next 12 months, similar to its two-year rate. This projection doesn't excite us and indicates its newer products and services will not catalyze better top-line performance yet.

Gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor.

Veralto has best-in-class unit economics for an industrials company, enabling it to invest in areas such as research and development. Its margin also signals it sells differentiated products, not commodities. As you can see below, it averaged an elite 58.5% gross margin over the last five years. Said differently, roughly $58.46 was left to spend on selling, marketing, R&D, and general administrative overhead for every $100 in revenue.

This quarter, Veralto’s gross profit margin was 60.1%, in line with the same quarter last year. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, suggesting its input costs (such as raw materials and manufacturing expenses) have been stable and it isn’t under pressure to lower prices.

Veralto’s operating margin might fluctuated slightly over the last 12 months but has remained more or less the same, averaging 22.9% over the last five years. This profitability was elite for an industrials business thanks to its efficient cost structure and economies of scale. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, Veralto’s operating margin might fluctuated slightly but has generally stayed the same over the last five years. We like to see margin expansion, but we’re still happy with Veralto’s performance considering most Air and Water Services companies saw their margins plummet.

This quarter, Veralto generated an operating margin profit margin of 23.2%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Veralto has shown terrific cash profitability, putting it in an advantageous position to invest in new products, return capital to investors, and consolidate the market during industry downturns. The company’s free cash flow margin was among the best in the industrials sector, averaging 17.5% over the last five years.

Veralto’s free cash flow clocked in at $258 million in Q3, equivalent to a 18.4% margin. This result was good as its margin was 2 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, leading to temporary swings. Long-term trends are more important.

Veralto reported $1.78 billion of cash and $1.97 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $1.36 billion of EBITDA over the last 12 months, we view Veralto’s 0.1× net-debt-to-EBITDA ratio as safe. We also see its $104 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was good to see Veralto provide full-year EPS guidance that slightly beat analysts’ expectations. We were also glad its EPS outperformed Wall Street’s estimates. On the other hand, its revenue guidance for next quarter slightly missed. Overall, this print was mixed. The stock remained flat at $103 immediately following the results.

Updated: December 4, 2025 at 10:29 PM EST

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Veralto.

Veralto has some positive attributes, but it isn’t one of our picks. Although its revenue growth was uninspiring over the last four years, its admirable gross margins indicate the mission-critical nature of its offerings.

Veralto’s P/E ratio based on the next 12 months is 24.9x. Beauty is in the eye of the beholder, but we don’t really see a big opportunity at the moment. We're fairly confident there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $115.24 on the company (compared to the current share price of $102.89).