VLTO — Veralto Corporation

Sentiment is genuinely two-sided. The constructive side: Q2 2026 (reported 2026-07-28) delivered sales of $1.474B, up 7.6% reported / 4.2% core, adjusted EPS of $1.11 that beat consensus, a $0.05 IEEPA tariff refund, and a raised FY26 adjusted EPS guide to $4.35–$4.43 with >100% FCF conversion — prompting target increases from Barclays ($117), BNP Paribas ($120) and RBC ($109). The cautious side: the sell-side aggregate rating is still only 'Hold' (13 raters: 6 buy, 7 hold, 0 sell), and the tape has cooled rather than celebrated — as of 2026-09-13 the shares were down 2.29% over one week and 2.66% over one month with an RSI(14) of 40.57, below both the 20-day (-3.36%) and 50-day (-1.54%) moving averages. Net: constructive fundamentals, unconvinced price action.

Revenue has ground steadily higher with no cyclical air pockets: from $1.255B in Q3 2023 to $1.474B in Q2 2026, with YoY growth of +6.4% (Q2'25), +6.9% (Q3'25), +3.8% (Q4'25), +6.8% (Q1'26) and +7.5% (Q2'26) — a Q4 2025 soft patch followed by re-acceleration in 2026, i.e. stable mid-single-digit growth rather than a structural inflection. Gross margin is the standout and is genuinely structural, not a blip: 57.6% in Q3 2023 to 61.2% in Q2 2026, a ~360bp climb with the latest quarter the best in the series. GAAP operating margin is a different story — roughly flat-to-down at 21.4% in Q2 2026 versus 22.8% a year earlier and 23.8% in Q1 2026 — which management says comes alongside a 24.6% adjusted operating margin, meaning the GAAP-to-adjusted gap (acquisition amortization and integration costs) is widening. Diluted EPS is growing faster than revenue at low-double-digits: $0.98 in Q2 2026 vs $0.89 (+10.1%), $1.02 in Q1 2026 vs $0.90 (+13.3%), $1.01 in Q4 2025 vs $0.91 (+11.0%). Free cash flow confirms the quality — TTM FCF of $1,047M is up ~11% YoY (from ~$943M), though Q2 2026 operating cash flow was dead flat at $340M vs $339M, so the FCF growth leans on Q4 2025 (+10.6% YoY) and Q1 2026 (+19.7% YoY). Verdict: stable revenue, expanding gross margin, low-double-digit EPS and FCF growth, with a mild latest-quarter GAAP margin dip that deserves watching rather than panic.

Fair, with a modest valuation cushion versus its own short history. As of 2026-09-13 the stock traded at $94.10 on a TTM P/E of 23.58 and a forward P/E of ~21.5x on FY26E EPS of $4.382 — roughly 7-8% below its own reported 5-year average P/E of 25.44, though that average covers only the post-spinoff period and is therefore a weak anchor. P/S is 4.03 vs a 5-year average of 4.34, again a mild discount. The PEG of 2.24 looks rich, but mechanically it just reflects ~10.5% implied EPS growth (23.58 / 2.24) — which is roughly what the company is actually delivering, so it is not evidence of mispricing either way. P/B of 7.45 flatters nothing: it reflects a capital-light, goodwill-heavy post-carve structure ($3.10B equity against $8.56B of assets), not a stretched book. The ratio screener's EV/EBITDA of 18.05x looks full on its own EBITDA definition, but on my estimate of ~$1.6B adjusted EBITDA (24.5% adjusted operating margin on ~$5.84B FY26E revenue, plus D&A), the multiple is closer to 15x. TTM FCF yield is ~4.6% ($1,047M / $22.94B). Nothing here is cheap on absolutes, and nothing is stretched.

The market is paying for roughly 8-10% forward EPS growth and getting it, so this is not a case of pricing in growth that hasn't arrived — nor of underpricing a turnaround, because there is no turnaround to price. The nuance is in the quality of the guidance raise: FY26 adjusted EPS went from $4.20-$4.28 to $4.35-$4.43, a ~$0.15 midpoint increase, of which $0.05 is a non-repeatable IEEPA tariff refund — so roughly two-thirds of the raise is operational and one-third is a one-off. Meanwhile the FY26E EPS of ~$4.39 sits well above TTM GAAP EPS of ~$4.03, and that gap is largely the acquisition amortization that compressed Q2 2026 GAAP operating margin to 21.4%. Practical read: the earnings bridge is credible but flattered at the margin. If VLTO keeps converting mid-single-digit revenue growth into low-double-digit EPS growth, the ~21.5x forward multiple is defensible; if organic growth slips back toward 3%, the multiple is not.

Mildly soft within an intact longer-term uptrend. As of 2026-09-13, RSI(14) stood at 40.57 — weak-leaning but nowhere near oversold — with price 3.36% below the 20-day SMA, 1.54% below the 50-day SMA, and still 0.79% above the 200-day SMA. The longer arcs are positive (3-month return +12.88%, 6-month +4.32%) against a flat-to-negative recent tape (1-week -2.29%, 1-month -2.66%). This is a pullback inside a $80-$110 range, not a breakdown. Entry-timing implication: there is no momentum confirmation to buy here, but there is also no capitulation to exploit. A push back above the 50-day (~$95-96) would be the tactical green light; an RSI dip into the low 30s would be the better value entry.

• Municipal water infrastructure spending and tightening environmental/effluent compliance rules provide secular, largely non-cyclical demand for the Water Quality segment — the reason this business is defensively positioned versus broad industrials.
• Industrial capex normalization is the real macro headwind: the Product Quality & Innovation (PQI) segment (marking, coding, packaging, color management) is tied to packaged-goods production volumes, which cool when consumer/industrial demand slows.
• Tariff and trade policy cuts both ways — the $0.05 per share IEEPA refund flattered Q2 2026, while input cost pressure from tariffs remains a live risk to the 61.2% gross margin.
• Interest rate normalization lowers friction on the $2.679B of long-term debt taken on for M&A, but also raises the return bar for the company's acquisition-led capital allocation strategy.
• FX translation: reported growth of 7.6% versus 4.2% core in Q2 2026 implies roughly 3.4 points of non-organic contribution, with a substantial non-US revenue base — a weaker dollar flatters reported numbers and a stronger dollar does the reverse.

• Q3 2026 earnings, tentatively scheduled for late October 2026 (historical precedent ~October 27) — the first real test of whether the raised $4.35-$4.43 FY26 guidance is conservative or already fully earned, and whether gross margin holds above 60%.
• Integration and synergy disclosure on the recently announced bolt-ons — Alfaa UV (announced July 2026, UV water treatment) and Cleanwater1 (announced August 2026, disinfection) — first meaningful read due with Q3 results.
• Further bolt-on M&A deployment: with $2.119B of cash and $1.047B of TTM free cash flow against only ~$560M of net debt, Veralto has substantial firepower, and each deal is a potential re-rating or dilution event.
• Sell-side target revisions — the consensus target of $110 (FMP's six contributors averaging $109.67, range $104-$114; the research brief cites $111-$113 with a wider $100-$136 spread) sits ~17% above the 2026-09-13 price of $94.10, and target convergence toward that level is itself a catalyst.
• Continued expansion of the recurring revenue base (~60% of sales from consumables, software and services), which is the main structural lever for multiple expansion as the spin-off history lengthens.

• GAAP operating margin compressed to 21.4% in Q2 2026 from 22.8% a year earlier even as revenue grew 7.5% — a widening GAAP-to-adjusted gap (adjusted was 24.6%) that signals rising acquisition amortization and integration costs and could keep reported earnings below the adjusted narrative.
• Operating cash flow was flat year over year in Q2 2026 ($340M vs $339M), so the impressive TTM FCF growth of ~11% depends on Q4 2025 and Q1 2026 — one bad working-capital quarter would puncture the free-cash-flow story that supports the multiple.
• Segment cyclicality: PQI's exposure to packaging and industrial production means a genuine industrial downturn would hit roughly half the company, offsetting the defensive Water Quality side.
• Balance-sheet direction of travel: long-term debt jumped from $1.962B in Q1 2026 to $2.679B in Q2 2026 (D/E of 1.091) to fund M&A, while cash simultaneously rose to $2.119B — net debt of only ~$560M is comfortable today (~0.4x TTM EBITDA), but a sustained acquisition campaign could change that quickly.
• Valuation tolerance is thin at a 23.58x TTM P/E and 7.45x book: if organic growth decelerates from ~4-5% core toward low single digits, or if the $0.05 tariff refund proves to be the last favorable one-off rather than the first, there is limited multiple support below $94.

Veralto is a genuinely good business — ~60% recurring revenue, a 61.2% gross margin that has structurally improved ~360bp in three years, 16.1% ROIC, a -1.16% accruals ratio confirming earnings are backed by cash, and net leverage of only ~0.4x EBITDA. But 'good' is not the same as 'cheap': organic growth is mid-single-digit, GAAP operating margin actually slipped to 21.4% in Q2 2026, operating cash flow was flat YoY that quarter, and ~$0.05 of the guidance raise was a one-off tariff refund. At $94.10 on 2026-09-13 the stock trades at ~21.5x forward EPS and about 9% below my calculated fair value of $103 — a reasonable, not compelling, entry. I would want either a dip toward the $85-88 area (or an RSI reading in the low 30s) or a reclaim of the 50-day average before treating this as an add.

Two independent methods converge near $103 as of 2026-09-13: (1) a 22x forward P/E — justified by ~8-10% forward EPS growth, ~60% recurring revenue and a 23.58x TTM multiple trading below its own short-run 25.44x average — applied to ~$4.70 of FY2027E EPS (FY26E guidance midpoint of $4.39 grown ~8%), giving $103.4; and (2) a simplified DCF using TTM free cash flow of $1,047M growing 7% annually for five years, a 3% terminal rate, an 8% WACC and $560M of net debt, giving ~$103.3 on ~243.8M shares. That figure sits ~9% above the 2026-09-13 price of $94.10 and below the ~$110 sell-side consensus target.