Over the past six months, Veralto’s shares (currently trading at $98) have posted a disappointing 12% loss while the S&P 500 was flat. This was partly driven by its softer quarterly results and might have investors contemplating their next move.
Is there a buying opportunity in Veralto, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Even though the stock has become cheaper, we're cautious about Veralto. Here are three reasons why there are better opportunities than VLTO and a stock we'd rather own.
Why Is Veralto Not Exciting?
Spun off from Danaher in 2023, Veralto (NYSE: VLTO) provides water analytics and treatment solutions.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance can indicate 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 3.4% compounded annual growth rate over the last three years. This was below our standard for the industrials sector. 
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Veralto’s revenue to rise by 2.7%, close to its 3.3% annualized growth for the past two years. This projection doesn't excite us and suggests its newer products and services will not lead to better top-line performance yet.
3. Free Cash Flow Margin Dropping
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, Veralto’s margin dropped by 2.1 percentage points over the last four years. If its declines continue, it could signal increasing investment needs and capital intensity. Veralto’s free cash flow margin for the trailing 12 months was 15.8%.
Final Judgment
Veralto isn’t a terrible business, but it doesn’t pass our quality test. After the recent drawdown, the stock trades at 26.4× forward price-to-earnings (or $98 per share). At this valuation, there’s a lot of good news priced in - we think there are better investment opportunities out there. Let us point you toward one of our all-time favorite software stocks.
Stocks We Would Buy Instead of Veralto
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