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Where we stand on Veralto after a solid quarter in its first earnings as a public stock
Club name Veralto (VLTO) delivered a solid first earnings report as a public company, offering assurances that the business playbook it learned from its former owner, Danaher (DHR), will be utilized as it charts its own course independent of the life sciences giant. Sales rose 3% year over year to $1.26 billion in the three months ended Sept. 30. Adjusted earnings per share (EPS) came in at 75 cents in the quarter, one penny below the same period a year ago had it been a standalone firm at the time. VLTO mountain 2023-10-02 Veralto since Oct. 2, 2023 Shares of Veralto, an industrial S & P 500 company focusing on water and packaging quality, rose modestly on Thursday, shaking off earlier declines, to trade around $71.50 each. When the Veralto spinoff from Danaher was completed earlier this month, shareholders like us received one VLTO share for every three shares of DHR owned. At the time, we decided to keep our VLTO shares. Bottom line Nothing in Veralto’s report Wednesday night or on Thursday morning’s conference call was all that revelatory. Of course, Veralto’s stock has struggled since it began trading at the start of October. But the weakness isn’t exactly a shock due to the nature of spin-offs, which give investors stakes in new companies they don’t necessarily want to own. At a high level, we were encouraged by management’s commentary on the potential for deal-making now that Veralto is no longer under the Danaher roof. On the call Thursday, Veralto CEO Jennifer Honeycutt said the company is considering a number of potential targets, while stressing that management will take a “very disciplined approach” to any acquisitions to ensure value can be created over time. It’s a strategy Danaher has used for years to great success, and we’re pleased to see Veralto is already looking to employ its own modified version. Ultimately, though, Veralto’s results this time around were a non-event because until the end of the third quarter, the company was part of Danaher as its Environmental & Applied Solutions operating segment. Danaher reported results before Tuesday’s opening bell , providing an early look at Veralto’s financials. A quick reminder on the kinds of products and services Veralto provides: Its water-quality division makes UV light systems that help disinfect municipal water supplies, including New York City’s, and its product-quality and innovation segment (PQ & I) produces commercial printers that put expiration dates on packaged foods sold in grocery stores. In other words, Veralto touches many facets of everyday life despite not being a household name. As for how we are thinking about the our position currently, we are debating it. We like the business, which is why we’ve held onto our shares. However, at a less than 0.5% weighting, the position is largely immaterial from a higher-level portfolio management perspective. In a market that is revealing opportunities daily due to broad-based weakness resulting more from high interest rates and energy prices, and not corporate fundamentals, we question if it makes more sense to build the name up or simply take the cash and look to redeploy it elsewhere. As a result, we maintain our 2 rating for the time being. Quarterly commentary We don’t have adequate data to provide a comparison of Veralto’s results to analyst estimates, but overall the report looked good. Recall that in Danaher’s earnings report, third-quarter results for the Environmental & Applied Solutions outpaced expectations for both sales and operating income. We’ve included a chart below in order to provide what information we do have as well some insight into the performance versus last year. Positives to note include the fact Veralto’s cost of sales grew slower than actual sales, resulting in gross margin expansion. On the other hand, the benefit to gross income was given back in higher selling, general and administrative expenses (SG & A) “related to growth investments and higher labor costs.” Research-and-development expenses also were higher, resulting in no annual change to operating income. Veralto’s adjusted operating margin contracted in the third quarter compared with the year-ago period, and and cash flows also were down on an annual basis. On Thursday’s call, CFO Sameer Ralhan said Veralto implemented some cost optimizations in the third quarter that will start delivering benefits in the ongoing fourth quarter. Additionally, the devaluation of the Argentine peso weighed on margins, Ralhan said, particularly in Veralto’s PQ & I segment. Other notable dynamics in Veralto’s third quarter include free cash flow generation coming in at 113% of GAAP earnings (which was higher than adjusted earnings at 83 cents per share). As we noted in our Danaher analysis earlier this week, earnings backed by cash are considered to be high quality, so this is certainly a positive. Geographically, Veralto generated 48% of sales in North America, 22% of sales in Western Europe and 28% of sales in High Growth Regions, which includes China, where sales were down high-teens. Honeycutt said Veralto is feeling the pain from “broad weakness” in China’s economy, which isn’t exactly a surprise given the recent earnings reports from other companies operating in the country, such as fellow Club holding Procter & Gamble (PG). Over the longer term, though, Honeycutt said Veralto remains confident in China’s attractiveness as a market. More generally, Honeycutt expressed optimism that Veralto will be able to deliver “steady growth, consistent with our historical track record.” Guidance In the fourth quarter, management expects core sales growth to be flat to down low-single digit percent, compared with the year-ago period, as the company grapples with lower demand for consumer packaged goods — which is bad for its PQ & I division — and further weakness in China impacting both segments. The adjusted operating profit margin is expected to be between 23.5% and 24.5%, which even on the low end of the guidance would represent an increase compared with Q3. Meanwhile, management guided for adjusted diluted earnings to fall in the range of 79 cents to 84 cents per share. Finally, Veralto expects to initiate a quarterly dividend of 9 cents per share in the fourth quarter. (Jim Cramer’s Charitable Trust is long VLTO, DHR. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
A shopper makes their way through a grocery store on July 12, 2023 in Miami, Florida.
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