Electrical Equipment & Parts company Veralto is standing out today, surging to $104.94 and marking a 5.4% change. In comparison the S&P 500 moved only 1.0%.
VLTO currently sits within range of its analyst target price of $102.58, which implies that its price may remain stable for the near future.
Surprisingly, analysts give the stock an average rating of buy, which shows that they believe prices could continue to move. Over the last year, Veralto shares have outperformed the S&P 500 by 10.2%, with a price change of 28.0%.
Veralto Corporation provides water analytics, water treatment, marking and coding, and packaging and color services worldwide. The company belongs to the industrials sector, which generally includes cyclical companies -- with the exception of conglomerates whose business may span several industries. Cyclical companies experience higher sales during periods of economic expanision, and worsening outlooks during recessions.
Veralto's trailing 12 month P/E ratio is 30.3, based on its trailing EPS of $3.46. The company has a forward P/E ratio of 28.9 according to its forward EPS of $3.63 -- which is an estimate of what its earnings will look like in the next quarter.
The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the second quarter of 2024, the industrials sector has an average P/E ratio of 25.19, and the average for the S&P 500 is 28.21.
VLTO’s price to earnings ratio can be divided by its projected five-year growth rate, to give us the price to earnings, or PEG ratio. This allows us to put its earnings valuation in the context of its growth expectations which is useful because companies with low P/E ratios often have low growth, which means they actually do not present an attractive value.
When we perform the calculation for Veralto, we obtain a PEG ratio of 4.57, which indicates that the company is overvalued compared to its growth prospects. The weakness with PEG ratios is that they rely on expected growth estimates, which of course may not turn out as expected.
To gauge the health of Veralto's underlying business, let's look at gross profit margins, which are the company's revenue minus the cost of goods only. Analyzing gross profit margins gives us a good picture of the company's pure profit potential and pricing power in its market, unclouded by other factors. As such, it can provide insights into the company's competitive advantages -- or lack thereof.
VLTO's average gross profit margins over the last four years are 56.7%, which indicate it has a potential competitive advantage in its market. These margins have slightly increased over the last four years, with an average growth rate of 0.4%. Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Veralto's last four annual reports, we are able to obtain the following rundown of its free cash flow:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cash Flow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2023 | 263,000 | 22,000 | 241,000 | -26.75 |
| 2022 | 337,000 | 8,000 | 329,000 | -60.93 |
| 2021 | 896,000 | 54,000 | 842,000 |
- Average free cash flow: $470.67 Million
- Average free cash flown growth rate: -35.8 %
- Coefficient of variability (the lower the better): 0.0 %
With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in VLTO have received an annualized dividend yield of 0.1% on their capital.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (market value divided by book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method.
Veralto's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 18, so the company's assets may be overvalued compared to the average P/B ratio of the Industrials sector, which stands at 3.17 as of the second quarter of 2024.
Veralto is by most measures overvalued because it has a higher P/E ratio than its sector average, a higher than Average P/B Ratio, and positive cash flows with a downwards trend. The stock has poor growth indicators because it has a an inflated PEG ratio and strong operating margins with a stable trend. We hope you enjoyed this overview of VLTO's fundamentals.
