Veralto (VLTO)

Total return at 5 years: 5.4%/year = 4.8% appreciation + 0.6% dividend. The target price ($124) is ex-dividend; the $3 in dividends collected over 5 years are added separately.

By both methods, the value today (DCF $112 · Multiples $103) exceeds the market price ($98).

Today — fairly valued: at $98 trades ~4.2% below its value discounted to today (~$103); the discount is positive but does not reach the margin of safety we require (≥38%).

At 5 years — En valor: the target price ($124) plus dividends yield between the 4% floor and the 10% average return — a reasonable return, though without the margin of a great investment.

The bridge: the return at 5 years exceeds the risk-free rate (4.5%) — but the discount does not reach the required margin of safety (≥38%). To require a 15% annual return, it would need to be bought at ~$64.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($98) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The market discounts less growth (2.2%/year) than we project (5.0%/year) → if the base case holds, there is margin: perception is more pessimistic than the estimated reality.

That growth implies ~$1.2 bn of owner earnings in year 5 (vs ~$1.3 bn of our base case). It recalculates if the DCF assumptions are edited.

Year-by-year projection of the selected scenario. From each year, two versions of the flow are derived: growth FCF (operating flow − total capex, the cash surplus) and maintenance FCF (the owner earnings: what the business yields if it only sustains its capacity). Cash accumulates the retained surplus —what is not returned as dividend or buyback—, so that EV falls and multiples compress going forward. The valuation is done on EV/EBIT. In edit mode, revenue, margins, capex, and exit multiples can be adjusted.

Year 0 is the TTM re-based to 3 July 2026 from the second-quarter earnings 8-K (Item 2.02, 28-Jul-2026): XBRL does not yet incorporate that quarter, so the levels are re-based via the identity FY2025 + cumulative first half of 2026 − cumulative first half of 2025, following the filing's cumulative-column convention. The resulting TTM revenue (US$5,696 million) and TTM free cash flow (US$1,047 million) match exactly those the company publishes in the release, which validates the rebase. Year 1 of the path starts from the company's raised guidance (organic growth of 4.0-4.5% for the full year, with guided acceleration to 5-6% in the second half), not from the raw historical trajectory, and decays smoothly toward low-to-mid single-digit terminal growth consistent with a quality industrial with a bolt-on acquisition runway. It is valued on EV/EBIT —not on P/E like the reference twin (Caterpillar)— because Veralto has no captive finance business that would justify treating it at the net income level: it is a conventional capital-light industrial, and EBIT charges for maintenance capex without giving away the investment as an EBITDA multiple would. Invested capital and debt enter the model at their real balance sheet levels (cash ~US$2.1 billion, total debt ~US$3.4 billion), unlike the twin, which zeroes them out because of its captive funding complication. With no sustained buyback history (zero in FY2025, a US$750 million authorization only announced in November 2025), the cash surplus accumulates (accumulateCash) rather than being modeled as a share reduction, following the rule of "when in doubt, less buyback". The base case exit multiple (15× EV/EBIT) sits in the upper half of the industrial archetype band (12×-18×) for a return on capital of approximately 25%, well above the 10% bar, and a stable though narrow moat.

Today's elevated multiple is the price of growth: if the business grows, the entry point cheapens on its own going forward (EV falls as cash increases). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—, so the value curve shows whether value creation is concentrated in the early or the later years. The required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $124 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $98, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $124 in 5 years plus $3 of dividends collected (the dividend adds to the return, not to the price) and a required return of 4.5% annually, the maximum to pay today is $103. Against the current market price ($98), the margin of safety is 4.2% (trades below the maximum → there is margin) and the total return at that price would be 5.4% annually.

• Entry multiple. Trades at a multiple consistent with the industrial archetype band, without a marked discount to comparably quality peers
• Margin of safety. It trades close to intrinsic value, far from the required margin of safety.
• No discount or euphoria. Shows none of the discount of a cycle bottom
• Total expected return. The estimated 5-year return at market price is +5%, with the dividend contributing a smaller, growing share

Each margin over sales, year by year: historical (solid line) → projection (dotted).

• ✓ ROIC exceeds the cost of capital (~10%)
• ✓ CFROIC backs up the ROIC (99%, cash vs. accruals)
• ✓ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• Return on capital. ROIC of approximately 25% on real invested capital, well above the 10% bar
• Cash generation. TTM FCF of ~US$1.0 billion with minimal capex (~1% of sales), well below depreciation
• Reinvestment runway. The bolt-on acquisition engine offers reinvestment runway, though at purchase multiples that have been rising
• Earnings quality. Moderate non-GAAP adjustments (amortization of acquired intangibles, one-time restructuring in 2026), with no red flags of accounting aggressiveness

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

Veralto's central driver is the installed base of instruments: every unit placed (in water or in marking/packaging) generates recurring sales of consumables, service and software that today account for ~61% of total sales. Growth by segment combines organic volume with price/mix (1.5-2.6pp in 2025) and a steady contribution from bolt-on acquisitions, not reflected in the top-level drivers.

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (03-jul-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Current guidance. FY2026 guidance raised to 4.0-4.5% organic growth, with acceleration expected to 5-6% in the second half
• Historical trajectory. Reported growth FY23-FY25: 3.1%, 3.4%, 6.0%, with price/mix contributing steadily
• Inorganic growth. Depends in part on continuing to acquire businesses at reasonable prices, with purchase multiples that have been rising
• FX sensitivity. Dollar-reported growth has been affected by currency headwind in recent quarters

• Recurring revenue model. ~61% of 2025 sales come from consumables, spare parts, service and software on the installed base, not from the one-off sale of the instrument
• Segment diversification. Two segments of similar economic nature (water and marking/packaging), without excessive dependence on either
• Customer concentration. No single customer exceeded 10% of sales in the last three fiscal years
• Competitive intensity. The filing itself states it cannot quantify its aggregate competitive position against a wide range of competitors
• Geographic exposure. 27% of sales in high-growth markets, with FX as a recent headwind on the dollar-reported figures

Not all debt is equal: only the structural needs refinancing; the rest is operational (self-liquidating).

Structural debt is what is exposed to the contraction phase of the cycle; operational debt (leases, matched funding) self-liquidates with the business.

• ✓Leverage (net debt / EBITDA)Net debt / EBITDA 0.9x
• ✓Interest coverage (EBIT / interest)15.1x
• –Liquidity (current ratio)no data
• ✓Cash quality (CFROIC vs ROIC)CFROIC backs 99% of ROIC
• ✓Value creation (ROIC − 10% bar)+15pp
• ✓Malinvestment test (capex vs incremental ROIC)Capex/D&A 0.7x — no over-investment
• !Float / working capitalConsumes cash $0 bn (positive WC)
• ✓Dilution (SBC % of revenue + shares)SBC 1.3% of revenue

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Leverage. Total debt of ~US$3.4 billion against equity of ~US$3.0 billion; a consolidated net leverage financial covenant in the credit agreement
• Liquidity. Cash of ~US$2.1 billion plus up to US$1.5 billion available under a revolving line
• Cash conversion. Guidance of free cash flow conversion above 100% of GAAP net income for FY2026
• Impairment risk. ~US$3.4 billion of goodwill and intangibles on the books, exposed to impairment charges from a failed integration

Who owns the shares — the alignment and whether there is a controlling shareholder.

• Track record. CEO at the helm since the separation from Danaher in 2023, inheriting the Veralto Enterprise System
• Capital allocation. Prioritizes bolt-on acquisitions funded with its own cash, with a recent dividend and a newly authorized buyback
• Skin in the game. Modest executive ownership in percentage terms, typical of a recent spin-off with no founding family
• Transparency. Explicitly acknowledges in the filing the limits of its competitive information rather than overstating market position

• The spin-off from Danaher (September 2023) still has a short track record as an independent company, with more limited analyst coverage and comparables than its established peers
• The growth acceleration guided for the second half of 2026 —particularly in Product Quality & Innovation— has not yet shown up in reported results, so the market awaits confirmation before paying the full multiple
• The current price shows neither the discount of a cycle bottom or the premium of recent euphoria

It trades close to intrinsic value, far from the required margin of safety. The market already recognizes much of the business's quality —stable moat, return on capital well above the 10% bar— and today's price captures part of the growth acceleration the company guided for the second half of 2026, still to be confirmed in reported results.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at -3%/year (-13% total): the margin of safety protects the downside. The bull (+12%/year, +80% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• Debt financial covenant. Breaching the consolidated net leverage ratio without a waiver would trigger accelerated maturity of the debt
• Dependence on M&A. Historical growth depends in part on continuing to acquire businesses at reasonable prices
• Tariffs and international trade. ~56% of sales outside the U.S., exposed to tariffs and trade countermeasures since 2025
• Demand cyclicality. Quarterly results difficult to forecast due to dependence on customers' capital budgets
• Short history as an independent company. Spun off from Danaher only in 2023, with pre-separation statements that include corporate allocations not representative of the standalone operation

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  A narrow moat and ROIC 25% above the 10% bar, but the margin is limited (+4%) → excellent business at a fair price.

• Peter Lynch Growth at a reasonable price (GARP)

  A cyclical growing 5% at a multiple/growth of 4.0 → expensive for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Earnings yield 5% (EBIT/EV) + ROIC 25% → brushes the Magic Formula.

• Howard Marks Perception vs reality + cycle

  The price discounts 2% vs our 5%: perception is more pessimistic than reality, with an identified source of the discount.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor -3%/yr, bull-scenario ceiling +12%/yr over 5y: reasonable asymmetry, without an ample cushion.

• Pat Dorsey Moat strength (Five Rules)

  A narrow moat, stable; sources: switching costs, intangibles, efficient scale, cost advantage → partially passes the Five Rules.

• Aswath Damodaran Expectations implied by the price

  Justifying the price requires discounting 2%, within what we project (5%) — the story squares with the numbers.