Is the Market Underestimating Veralto's Growth Potential?

The global water and product quality solutions market is poised for sustained growth, driven by rising environmental regulations, urbanization, and demand for food safety. Yet, Veralto (VLTO)—a leader in these critical sectors—is trading at a valuation that appears disconnected from its fundamentals. With robust financial performance, recurring revenue streams, and strategic exposure to high-growth markets, the stock may be undervalued relative to its peers and future potential. Let's dissect why investors should consider Veralto as a compelling long-term opportunity.

Financial Fortitude: A Foundation for Growth

Veralto's Q1 2025 results underscore its resilience. Revenue grew 6.9% YoY to $1.33 billion, with non-GAAP adjusted net earnings of $0.95 per share, exceeding expectations. The company's adjusted operating margin of 25.0% highlights operational discipline, while its $142 million in free cash flow (up 39% YoY) signals strong liquidity.

The key to Veralto's stability lies in its 55% recurring revenue base, which provides a steady income stream from long-term contracts in industries like healthcare, food production, and industrial water treatment. This recurring model insulates the business from economic volatility, a critical advantage in uncertain macroeconomic environments.

Valuation: Undervalued Compared to Peers

At a P/E ratio of 27.62 (as of June 16, 2025), Veralto trades below its two-year average of 28.33 and slightly below its peer group's average of 27.68. However, this metric overlooks several strengths:

1. Growth Trajectory: Veralto's low-to-mid-single-digit sales growth guidance for 2025 is conservative compared to its historical performance. Its Water Quality segment, for instance, saw double-digit growth in Europe, while its Product Quality & Innovation (PQI) segment is benefiting from rising demand for digital workflow solutions in consumer-packaged goods.
2. Margin Expansion: Management expects adjusted operating profit margins to expand by up to 50 basis points YoY, driven by cost efficiencies and higher-margin digital solutions.
3. Peer Comparison:
4. Veralto's P/E is 22% lower than Xylem (XYL), which trades at 34.3, despite Veralto's stronger recurring revenue model and geographic diversification.
5. Its P/S ratio of 4.63 is in line with peers but underappreciates its high-margin analytics and software-driven offerings.

Catalysts for Revaluation

The market may be underestimating the following growth drivers:

1. Emerging Market Opportunities

Veralto's Water Quality segment is capitalizing on demand for industrial water treatment systems in regions like Asia-Pacific and the Middle East, where urbanization and industrialization are accelerating. Meanwhile, its water analytics solutions—which provide real-time data on water quality—are gaining traction in Europe, a market increasingly focused on sustainability.

2. Digital Workflow Solutions

The PQI segment's success stems from digital marking and coding systems, which reduce waste and improve traceability for consumer goods manufacturers. This aligns with global trends toward automation and compliance, creating a recurring revenue stream through software updates and service contracts.

3. Resilience to Macroeconomic Headwinds

Despite global trade uncertainties, Veralto's 55% recurring revenue and diversified customer base (spanning 16,000 global associates) provide a buffer against demand fluctuations. Management's proactive measures to mitigate tariff impacts—such as regionalizing supply chains—further underscore operational agility.

Technical Picture: Oversold, but Set for a Rebound

Technically, Veralto's stock is showing signs of a potential reversal. The RSI of 33.35 suggests it's oversold, while the 50-day SMA at $95.94 offers support. Though the 200-day SMA at $102.15 remains a resistance, the low volatility rate (1.81%) indicates stability. Short-term dips—like the projected June low of $89.53—could create entry points for investors.

Investment Thesis: Buy the Dip, Play the Long Game

Veralto's valuation appears to undervalue its recurring revenue model, margin expansion potential, and exposure to high-growth markets. The stock's 2030 price target of $158.36 (a 61.95% gain from current levels) reflects this optimism. However, historical backtests of RSI-based timing strategies reveal challenges: such approaches from 2020 to 2025 underperformed, with an overall return of 5.04% and a maximum drawdown of -13.57%. This underscores the need to prioritize fundamental strengths over short-term technical signals.

Recommendation:
- Aggressive Investors: Use dips below $90 (the June forecast low) to accumulate positions, focusing on long-term fundamentals.
- Conservative Investors: Average into the stock between $95–$100, targeting the $102.15 200-day SMA as a near-term upside target.

Risks to Consider

• Regulatory Delays: New environmental regulations could slow adoption of water treatment solutions.
• Trade Tensions: Geopolitical risks, particularly in Asia-Pacific, may disrupt supply chains.
• Technical Timing Risks: Historical data shows RSI-based strategies underperformed, emphasizing the need to avoid overreliance on technical indicators.

Conclusion

Veralto's financial strength, recurring revenue model, and strategic exposure to growth markets suggest the stock is undervalued. While short-term volatility may persist, the long-term trajectory—bolstered by margin expansion and digital innovation—positions Veralto for a valuation re-rating. Investors who recognize these overlooked strengths could benefit from buying the dips ahead of a potential breakout, prioritizing fundamentals over technical signals given their historically muted performance.

Final Take: Veralto's current valuation fails to capture its full potential. A strategic long position, especially on weakness, could yield substantial rewards as the market catches up to its story.

Data as of June 17, 2025. Past performance does not guarantee future results.