This health-care stock is set to complete another spin-off. Here’s what it means for our position in the stock

By Dustin Moskovitz On Sep 8, 2023

Medical equipment giant Danaher (DHR) will officially spin off its environmental-and-applied solutions segment later this month, and our plan is to remain invested in the soon-to-be standalone company, known as Veralto, which will trade under the ticker symbol VLTO. That expectation was reinforced Wednesday when Veralto management delivered a presentation for investors and Wall Street analysts. Veralto’s attractive characteristics include a history of steady revenue growth and cash generation, combined with the potential benefits typically afforded to spun-out companies – namely, a more focused management team that can invest as it sees fit, unencumbered by a larger corporate structure. Based on our current 520-share stake in Danaher, we’re set to receive 173 shares of Veralto on Sept. 30, the day the separation is officially completed. Our Danaher share count will not change post-spin, but Danaher’s stock price — currently trading around $255 a share — will adjust that day to reflect the departing value of Veralto. DHR YTD mountain Danaher’s stock performance year to date. What is Veralto? Veralto will consist of two primary divisions – water quality and product quality & innovation – which generated nearly $5 billion in combined sales in 2022 under the Danaher roof. The water quality unit contributed about 60% of that figure. Varelto’s various business areas may not have universal name recognition but they provide services and products used in everyday life. During Wednesday’s investor event, Veralto CEO Jennifer Honeycutt demonstrated how a water bottle is “the intersection of all of Veralto’s businesses” — from the water that needs to be treated and then undergo analytical testing, to the packaging and design of the bottle itself. Veralto is also an important player in municipal water supplies, including New York, the most-populous U.S. city. New York City has installed more than 50 custom-designed UV light systems – made by Veralto’s Trojan Technologies – to help disinfect up to 2 billion gallons of water each day, according to Melissa Aquino, senior vice president for the water quality unit. A financial overview Over the two decades ended in 2022, combined sales at Veralto’s businesses had a roughly 9.5% compound annual growth rate – going from about $800 million in 2002 to nearly $5 billion last year. Meanwhile, adjusted operating profit rose at an 11% compound annual growth rate, to $1.1 billion in 2022, compared with $140 million in 2002. On a core-revenue basis – which excludes the impact of currency fluctuations, as well as acquisitions and divestitures – both the water quality and product quality & innovation segments have delivered mid-single-digit growth over the long term, according to CFO Sameer Ralhan. The company’s overall core annual revenue growth rate of 4% over the past 10 years is above the 3% real U.S. GDP growth rate, on average, he said. Still, Ralhan said: “Our businesses have a tremendous track record of financial performance under Danaher’s ownership, and yet there are a number of opportunities to make these businesses even better and create tremendous value.” Veralto’s strategy to deliver those improvements will adhere to a modified version of the highly regarded Danaher Business System – which means not only running its own businesses more efficiently and growing margins, but also looking for strategic takeover targets As an independent entity, Veralto will have greater flexibility to use its cash to buy companies it deems attractive and embark on a value-creating strategy for those acquired entities — just as Danaher has consistently done. Bottom line We expect to stay invested in both Danaher and Veralto once the spin-off is completed and the tax-free share distribution occurs on Sept. 30. That’s a sentiment that’s been further strengthened by Danaher’s stock performance of late . As we noted when the transaction was first announced last year , Danaher has made smart, tax-advantaged divestitures in recent years – benefiting its remaining shareholders over the long term and, at least in the short term, shareholders in the spun-out entities. In July 2016, Danaher completed the separation of its industrial technologies and test-and-measurement businesses into a company called Fortive (FTV) – with DHR investors getting one share of Fortive for every two DHR shares they owned. In December 2019, Danaher finalized the separation of Envista (NVST), its collection of dental businesses. In that transaction, Danaher did a partial initial public offering of Envista stock in September 2019 , then later gave DHR investors the option to exchange some of their DHR shares for Envista stock. Investors can sometimes can be tempted to immediately sell their entitlements of a spun-off company as soon as they’re received. This makes sense to do if it’s a low-quality company with limited prospects for growth. But both Danaher’s recent spins resulted in investors seeing double-digit percentage gains in the new company after one year. Value was created by the separation of the businesses, and we think the same will happen again with Veralto. (Jim Cramer’s Charitable Trust is long DHR. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

A Miami supermarket in July 2023.

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