Investments In R&D And Acquisitions Like TraceGains Will Drive Future Success

Key Takeaways

• Strategic acquisitions and product innovation are set to drive revenue growth, market penetration, and improved margins for Veralto.
  
• Optimization of operations and proactive portfolio management are expected to enhance core growth, earnings, and margin performance.
  
• Heavy R&D investments and reliance on key sectors may not yield proportional profits, while currency fluctuations and limited growth in China could pressure margins and revenues.

Catalysts

Provides water analytics, water treatment, marking and coding, and packaging and color solutions worldwide.

• Veralto's increased investment in sales, marketing, and R&D is expected to capitalize on strengthening demand and drive future growth, likely impacting revenue growth and market penetration.
  
• The company's focus on innovation and new product launches, such as the 7920 UV laser marking system, positions it for revenue growth and improved margins through differentiated offerings.
  
• Strategic acquisitions, like TraceGains, enhance Veralto's digital solutions, potentially impacting core growth, gross margins, and recurring revenue, which could lead to increased earnings.
  
• The optimization of the Veralto Enterprise System (VES) aims to improve commercial architecture and operational efficiencies, likely resulting in margin expansion and enhanced earnings.
  
• A proactive approach to portfolio management, including divestitures and investments in emerging technologies, is expected to strengthen core growth rates and margin performance, positively affecting earnings.

Veralto Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Veralto's revenue will grow by 4.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 16.0% today to 17.8% in 3 years time.
• Analysts expect earnings to reach $1.1 billion (and earnings per share of $4.13) by about March 2028, up from $833.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 32.1x on those 2028 earnings, up from 29.2x today. This future PE is greater than the current PE for the US Commercial Services industry at 30.0x.
• Analysts expect the number of shares outstanding to grow by 0.29% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.99%, as per the Simply Wall St company report.

Veralto Future Earnings Per Share Growth

Risks

• Continued reliance on water quality and industrial sectors, especially if demand from sectors like data centers or power generation declines, could impact future revenues and net margins.
  
• The significant investment in R&D and sales and marketing, while aimed at expansion, may not yield proportional revenue or profit increases, potentially straining net margins.
  
• Currency fluctuations, particularly the strengthening of the U.S. dollar, present risks that could negatively affect both gross margins and earnings per share.
  
• Integration challenges or underperformance of acquisitions like TraceGains could hinder expected growth in the PQI segment, affecting overall profit margins and earnings.
  
• Limited growth expectations in China, a major market, could impact overall sales growth projections, putting pressure on revenue figures.

Valuation

• The analysts have a consensus price target of $111.937 for Veralto based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $130.0, and the most bearish reporting a price target of just $99.12.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $6.0 billion, earnings will come to $1.1 billion, and it would be trading on a PE ratio of 32.1x, assuming you use a discount rate of 7.0%.
• Given the current share price of $98.36, the analyst price target of $111.94 is 12.1% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.