TraceGains Acquisition Will Expand Future Market Presence In Cloud-Based Compliance

Key Takeaways

• Acquisition of TraceGains is expected to boost revenue through its cloud-based solutions for compliance and traceability in the food and beverage market.
  
• Strategic focus on growth tools, M&A opportunities, and operational excellence aims to enhance operational efficiency, market presence, and long-term value creation.
  
• Strategic acquisitions and external challenges, such as regulatory demands and flat sales in key markets, could strain Veralto's margins and growth prospects.

Catalysts

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

• The acquisition of TraceGains is expected to drive strong revenue growth through its cloud-based solutions for compliance and traceability in the food and beverage market, contributing to top-line growth.
  
• Increased focus on growth tools, operational excellence, and leadership development through the Veralto Enterprise System (VES) is anticipated to enhance operational efficiency, resulting in margin expansion.
  
• Strategic investments in sales, marketing, and innovation aim to support future revenue growth and market share expansion, positively impacting future earnings.
  
• PQI segment recovery, driven by sustained mid
• to high-single-digit growth in recurring revenue and equipment sales, is expected to result in improved earnings and profitability.
  
• Continued evaluation and execution of strategic M&A opportunities are poised to expand market presence and drive long-term value creation, enhancing revenue and earnings growth.

Veralto Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Veralto's revenue will grow by 6.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 15.7% today to 17.7% in 3 years time.
• Analysts expect earnings to reach $1.1 billion (and earnings per share of $4.1) by about January 2028, up from $806.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 33.9x on those 2028 earnings, up from 31.7x today. This future PE is greater than the current PE for the US Commercial Services industry at 32.1x.
• Analysts expect the number of shares outstanding to grow by 2.22% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.7%, as per the Simply Wall St company report.

Veralto Future Earnings Per Share Growth

Risks

• The recent acquisition of TraceGains, while strategically aligned, will be modestly dilutive to earnings in 2025 due to planned investments, which may impact the company's net margins in the near term.
  
• The guidance for Q4 shows a conservative outlook with potential margin impacts from higher corporate costs and the effects related to the TraceGains acquisition, which could indicate a cautious growth trajectory and affect operating margins.
  
• There is ongoing flat sales performance in China, a significant market, with no expected near-term improvement, which could limit revenue growth from this region.
  
• Foreign currency fluctuations, such as the prior year's impact from the Argentine peso devaluation, introduce risks that could unpredictably affect earnings and net income.
  
• Rising regulatory demands and the need for constant innovation and investment in growth initiatives could exert pressure on both net margins and the ability to sustain current growth rates.

Valuation

• The analysts have a consensus price target of $114.72 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 $134.0, 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 $6.1 billion, earnings will come to $1.1 billion, and it would be trading on a PE ratio of 33.9x, assuming you use a discount rate of 6.7%.
• Given the current share price of $103.45, the analyst's price target of $114.72 is 9.8% 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.