On Friday, Goldman Sachs initiated coverage on Veralto Corp. (NYSE: VLTO), starting with a Buy rating and setting a 12-month price target of $104. The firm highlighted the company's leadership in its market segments and its substantial global presence.
Veralto, recently spun off from DHR, operates primarily in two segments: Water Quality, which accounted for 60% of its sales in 2023, and Product Quality and Innovation (PQI), making up the remaining 40%.
Veralto holds over 20% of the global market share in water treatment and has a significant influence on the grocery sector in North America and Western Europe. According to Goldman Sachs, around 90% of grocery store products in these regions are impacted by Veralto's PQI business.
This involvement underlines the company's importance as a supplier to critical quality-sensitive spending areas like water, food, and pharmaceuticals, which tend to have high customer loyalty and demand consistency.
The company's business model is described as "razor/razor blade," wherein it sells instruments to customers initially and then maintains a steady revenue stream through the sale of consumables, spares, and services. Approximately 60% of Veralto's sales are recurring, stemming from these follow-on products and services, which typically have higher margins and provide the company with greater pricing power.
Goldman Sachs anticipates that Veralto's business model will contribute to further margin expansion, building on what are already some of the highest margins in the industry. The analyst's price target suggests an approximate 20% upside from the current levels, reflecting confidence in the company's growth prospects and market position.
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