Veralto Corp

Veralto's second-quarter adjusted EPS of $1.11 beat the FactSet consensus estimate by $0.10. Core sales increased by 4.2%, driven by 5.7% growth in water quality and 2% growth in product quality and innovation.

Why it matters: Management raised its 2026 guidance and now anticipates full-year adjusted EPS of $4.35-$4.43, up from $4.20-$4.28. The guidance now bakes in 4.0%-4.5% core sales growth, up from 3.0%-4.5% previously, as sales growth is poised to accelerate in the second half of the year. Water quality is seeing robust demand for water monitoring, treatment, and reuse solutions. The industrial water treatment business will benefit from data center growth, as well as other end markets supporting the data center buildout, including semiconductor, mining, and power generation. Product quality and innovation is poised to capitalize on growing adoption of digital workflow solutions as well as new product launches, which should help boost core sales growth in the second half of 2026.

The bottom line: We've raised our fair value estimate for wide-moat-rated Veralto to $107 per share from $104, driven by our slightly more optimistic near-term revenue growth and operating margin projections as well as the time value of money. Veralto has deployed roughly $480 million into share repurchases year to date, which we consider a good use of capital as the stock has traded at a meaningful discount to our fair value estimate for most of 2026.

Following the second-quarter earnings release, we've raised our fair value estimate for Veralto to $107 per share from $104, driven by our slightly more optimistic near-term revenue growth and operating margin projections, as well as the time value of money. Management raised its 2026 guidance and now anticipates full-year adjusted EPS of $4.35-$4.43, up from $4.20-$4.28. The guidance now bakes in 4%-4.5% core sales growth, up from 3.0%-4.5% previously, as sales growth is poised to accelerate in the second half of the year.

Across the cycle, we expect both segments to deliver mid-single-digit core sales growth, with water quality toward the top end and product quality and innovation toward the bottom. We believe the company is well positioned to capitalize on favorable secular trends across the water, food, and pharmaceutical end markets.

We expect Veralto to generate incremental operating margins of approximately 30%-35%, resulting in adjusted operating margins expanding from 24.3% in 2025 to roughly 27% by 2029. We assume a midcycle operating margin of around 26.5% and a weighted average cost of capital of 8.3%.

We assign Veralto a Wide Morningstar Economic Moat Rating attributable to customer switching costs and intangible assets. The company offers a broad portfolio of differentiated solutions that help customers reduce operating costs while addressing health, safety, and environmental concerns. Veralto benefits from a razor-and-blade business model, with roughly 61% recurring revenue derived from consumables, spare parts, services, and software. The company generates around 80% of its revenue from the food, water, and pharmaceutical end markets, where its solutions perform essential functions that have a high cost of failure. The company invests around 5% of its sales in research and development, ensuring continuous innovation that supports its economic moat.

We believe the water quality segment has a wide moat. The segment boasts an extensive portfolio of water treatment solutions and analytics that play a vital role in ensuring the safety, quality, and reliability of drinking water. We think the segment benefits from customer switching costs because customers rely on Veralto’s solutions in applications with a high cost of failure if water is not properly tested and treated. For instance, the potential cost of facility downtime could be up to 10 times the cost of annual water treatment in the firm’s ChemTreat business. Veralto’s water quality business has established a large installed base of equipment that generates a steady stream of recurring revenue (around 59% as of 2024) from services, chemical reagents, and digital solutions. Management estimates that the total value of consumable sales is typically 2-4 times the value of the original equipment sale over the average instrument life in the Hach business.

Water quality also benefits from strong intangible assets, including its brand names and reputation for quality and reliability. For example, the Hach brand has been a leading player in water analytics for over 70 years. Hach has established a reputation as a market leader, and its solutions help ensure water safety for around 40% of the global population, serving over 3.4 billion people each day. Veralto also benefits from a robust patent portfolio. For example, the Trojan brand offers UV treatment solutions for ultra-high-purity water, which has to meet stringent quality standards for semiconductor fabs.

We think the product quality and innovation segment has a narrow moat. The segment offers a range of marking, coding, packaging, and color solutions for consumer packaged goods and pharmaceuticals. We believe that product quality and innovation benefits from customer switching costs, and its installed base generates a relatively high level of recurring revenue (63% as of 2024). For example, the company sells continuous inkjet printers under a razor-and-blade model, with customers replacing cartridges as ink and solvent are consumed in printing. Furthermore, product quality and innovation solutions are also used in areas with a high cost of failure, such as facilitating product recalls in order to mitigate health and safety risks. Since Videojet printers are used by customers in production lines, guaranteeing uptime is an important part of the value proposition. These are not commoditized printers but differentiated marking systems that are used in a wide range of applications, including coding eggs and airplanes. For example, Videojet printers are used in Coca-Cola filling lines running up to 1,000 bottles per minute, and the ink must dry in milliseconds. Videojet offers remote printer health monitoring, predictive analytics, and rapid line recovery in order to minimize any interruptions. Consumables typically account for less than 1% of a customer’s total operating costs, which we think also gives the business solid pricing power.

In our opinion, the product quality and innovation segment also boasts strong intangible assets, particularly its brand names. A vast majority of the world’s top 20 pharmaceutical brands and top 25 consumer packaged goods brands rely on Veralto’s solutions. Overall, Veralto estimates that the product quality and innovation business accounts for approximately 90% of packaged items sold in a typical supermarket in North America or Western Europe. Another example of a strong brand in Veralto’s portfolio is the Pantone Matching System, a proprietary, standardized color-matching system used by over 10 million graphic designers to ensure color consistency.

We believe Veralto’s reputation for quality and reliability is important because customers rely on the company to ensure product quality and traceability by verifying brand authenticity, expiration dates, lot codes, and other attributes. Veralto’s solutions, including its software and analytics, also help customers accelerate the design process and ensure standardization and traceability. Ultimately, we believe Veralto’s reputation for reliability is a competitive advantage, driven by customer risk aversion, as customers rely on the product quality and innovation segment’s solutions to build trust in their own brands.

Veralto has inherited a proven business system of disciplined capital allocation and continuous improvement from former parent Danaher.

The spinoff from Danaher will allow Veralto to redeploy capital to its own business, as its former parent favored other segments from a capital deployment standpoint.

Veralto has established a large installed base of equipment that generates roughly 61% recurring revenue.

Given its M&A-heavy strategy, Veralto faces acquisition risk, including the possibility of overpaying and challenges integrating acquired companies.

We think Veralto has a lower organic growth profile than former parent Danaher.

Continuous M&A adds assets and goodwill to Veralto’s capital base, constraining growth in returns on invested capital.