Veralto (VLTO)

Water analytics and treatment company Veralto (NYSE:VLTO) reported Q1 CY2025 results topping the market’s revenue expectations, with sales up 6.9% year on year to $1.33 billion. The company expects next quarter’s revenue to be around $1.32 billion, close to analysts’ estimates. Its non-GAAP profit of $0.95 per share was 9.7% 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 performance is an indicator of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Regrettably, Veralto’s sales grew at a sluggish 3.8% compounded annual growth rate over the last three years. This was below our standard for the industrials sector and is a rough starting point 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 3.6% over the last two years aligns with its three-year trend, suggesting its demand was consistently weak.

This quarter, Veralto reported year-on-year revenue growth of 6.9%, and its $1.33 billion of revenue exceeded Wall Street’s estimates by 4.1%. 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 1.8% over the next 12 months, a slight deceleration versus the last two years. This projection is underwhelming and suggests its products and services will see some demand headwinds.

All else equal, we prefer higher gross margins because they make it easier to generate more operating profits and indicate that a company commands pricing power by offering more differentiated products.

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 58.2% gross margin over the last four years. That means Veralto only paid its suppliers $41.80 for every $100 in revenue.

Veralto produced a 60.4% gross profit margin in Q1, in line with the same quarter last year. Zooming out, Veralto’s full-year margin has been trending up over the past 12 months, increasing by 1.6 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as manufacturing expenses).

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Veralto has been a well-oiled machine over the last four years. It demonstrated elite profitability for an industrials business, boasting an average operating margin of 22.8%. 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 rose by 2 percentage points over the last four years, as its sales growth gave it operating leverage.

This quarter, Veralto generated an operating profit margin of 24.2%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

Revenue trends explain a company’s historical growth, but the change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Veralto’s EPS grew at an unimpressive 7.4% compounded annual growth rate over the last two years. This performance was better than its 3.8% annualized revenue growth but doesn’t tell us much about its efficiency because its operating margin didn’t expand during this time.

In Q1, Veralto reported EPS at $0.95, up from $0.84 in the same quarter last year. This print beat analysts’ estimates by 9.7%. Over the next 12 months, Wall Street expects Veralto’s full-year EPS of $3.65 to grow 2.1%.

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 16.8% over the last four years.

Taking a step back, we can see that Veralto’s margin expanded by 1.3 percentage points during that time. This is encouraging because it gives the company more optionality.

Veralto’s free cash flow clocked in at $142 million in Q1, equivalent to a 10.7% margin. This result was good as its margin was 2.5 percentage points higher than in the same quarter last year, building on its favorable historical trend.

Veralto reported $1.24 billion of cash and $2.63 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 $1.32 billion of EBITDA over the last 12 months, we view Veralto’s 1.1× net-debt-to-EBITDA ratio as safe. We also see its $112 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.

We were impressed by how significantly Veralto blew past analysts’ revenue and EPS expectations this quarter. On the other hand, its EPS guidance for next quarter missed significantly. Still, this quarter had some key positives. The stock traded up 2.1% to $95 immediately following the results.

Updated: May 16, 2025 at 11:04 PM EDT

Are you wondering whether to buy Veralto or pass? We urge investors to not only consider the latest earnings results but also longer-term business quality and valuation as well.

Veralto isn’t a terrible business, but it isn’t one of our picks. For starters, its revenue growth was uninspiring over the last three years, and analysts don’t see anything changing over the next 12 months. And while Veralto’s admirable gross margins indicate the mission-critical nature of its offerings, its projected EPS for the next year is lacking.

Veralto’s P/E ratio based on the next 12 months is 27.3x. This valuation tells us a lot of optimism is priced in - we think there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $109.51 on the company (compared to the current share price of $101.70).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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