Veralto: Thoughts On The Danaher Spinoff
Contributor since 2011 / 24614 Followers
Summary:
- Veralto Corporation, the former Environmental & Applied Solutions segment of Danaher Corporation, has started trading as a publicly traded entity.
- Veralto is a $5 billion business focused on water and product quality, with 60% of sales generated from water quality services.
- The spinoff has resulted in Veralto commanding a premium valuation, although marking an interesting business to keep track of.
Chunumunu
Shares of Veralto Corporation (NYSE:VLTO) started trading as a publicly traded entity early in October. Veralto is the former Environmental & Applied Solutions segment of Danaher Corporation (NYSE:DHR) which has spun off the business, to create two more focused businesses.
A spin-off of any business is interesting, as Danaher is looking to create value for its shareholders this way. This comes as the spun-off Veralto is interesting, being among the less performing business units within Danaher. Despite this observation, Veralto is a very interesting standalone business, although one which carries a demanding valuation here.
About The Spinoff & The Business
Danaher announced its intention to spin off Veralto about a year ago, as the spinoff closed on the final day of September this year, with trading set to begin in October. Investors in Danaher received one (1) share in Veralto for every three (3) shares held in Danaher. The business has some 246 million shares outstanding post the spinoff.
Veralto is a $5 billion leader in water and product quality. Some 60% of sales are generated from water quality services which include various brands and businesses like Hach, ChemTreat, Trojan Technologies, Aquatic Informatics, among others. These business are broadly active in water analytics and water treatment. More specific applications includes tackling and handle water scarcity, water quality, contamination regulation and sustainability.
The remaining 40% of sales are generated by the product quality & innovation segment including businesses like Videojet, Esko, X-Rite and Pantone which are active in marking & coding, and packing & color segments. Applications of these businesses include consumer safety, packaging proliferation, digitization, and sustainability.
The overall business is quite an interesting business. Not only did the $4.9 billion business in 2022 post 8% core sales growth, its margins are impressive with gross margins posted at 57%, while EBITDA margins came in at 24% of sales. Core sales growth slowed down to 4% in the first half of the year, with revenues reported at $2.48 billion. Operating profit margins were reported at 23%, which is supposed to include overhead costs, but this is always a big if of course how this really will develop as a standalone business.
In exchange for being “freed” separated Danaher, Veralto has agreed to pay Danaher a substantial amount of money. Net debt post the transaction is seen at $2.35 billion, which results in a 2.0 times leverage ratio.
And Now?
Post the spinoff, shares of Veralto are setting at $87 per share here. This works down to a $21.1 billion equity valuation, with the enterprise valuation coming in at $23 billion and change here. Based on 22% margins on a $5 billion revenue base, the company should be able to post operating profits of $1.1 billion per annum.
Assuming a roughly $100 million interest expense on the net debt load and tax rates of 25%, net earnings of $750 million work down to an earnings potential of around $3 per share.
This is backed up by the investor presentation, in which Veralto posted adjusted earnings of $2.96 per share for the year 2022, and that is after a $0.84 per share adjustment to factor in costs which the standalone entity is set to incur. These same adjusted earnings rose to $1.56 per share for the first half of this year, making a >$3 earnings per share number realistic.
Trading at $87, it is clear that investors are appraising a big valuation to the firm at 29 times earnings here. This is a very demanding multiple amidst reasonable leverage, as Danaher itself underwent all these efforts to become a more focused and highly valued business itself. This comes in part as Danaher has a higher portion of recurring sales than already a respectable number of Veralto in the higher fifties, while many of its businesses post higher margins as well.
Irony will it that some value has actually been destroyed, at least if we look at the near-term trading action. Shares of Danaher are down $37 to $210 per share at the moment of writing. This move cut the valuation of Danaher by $27.3 billion, which comes in reaction to Veralto being awarded an enterprise valuation of $23 billion and change.
This suggests that shares of Danaher Corporation have become a bit cheaper, even as the Veralto spinoff appears to have gone well.
A New Danaher In The Making?
The reality is that the positioning of Veralto Corporation is very interesting, certainly with great long-term secular growth trends seen. With Veralto being well positioned, I like the business from this angle, certainly if management can live up to the qualities of its former parent.
For now, the new management team has a hurdle to overcome, that of a demanding valuation from the get go, but Veralto will definitely be a stock and company to watch from here onwards.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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