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Roper (ROP) Technologies | NYSE: ROP

Covered by Stratosphere

A World-Class Allocator

Roper Technologies, Inc. ("Roper") is an acquirer, integrator, and operator of almost 50 businesses spanning a wide variety of industries and end markets. Roper focuses on asset-light business models with management teams that are aligned with Roper's strategy to compound cash year after year, decade after decade through organic growth opportunities.

Roper is a company unlike any other – its exceptional execution of business acquisitions, reinvestments into research and development, and coaching and support of each subsidiary's autonomous and passionate management team consistently drive strong financial and shareholder returns.

Stratosphere Score

9

Growth

5

Valuation

9

Quality

7

Margins

9

Dividend

5

Balance Sheet

7
Adrian Iwanicki

Author

Adrian Iwanicki

Equity Analyst

Investment Thesis

  1. Roper is a world-class capital allocator, sticking to its stringent capital deployment criteria in every acquisition to ensure maximal shareholder returns and future organic growth opportunities. 

  2. Roper's decentralized management structure, end-market neutrality, focus on niche markets, and improving cost efficiencies dually protect the company and its subsidiaries from competitors and enable the company to invest and innovate constantly.

  3. Despite a highly levered balance sheet and the slow organic growth experienced in 2020, Roper deleveraged faster than expected in 2021. The company is now below its target of sub-3.5x net-debt-to-EBITDA ratio with ample cash, especially once the TransCore sale takes place in Q1 2022.

Key Company Metrics

A set of metrics we constantly keep updated to monitor the investment thesis.

Competitive Advantages

End-Market Neutral

Roper has a leg up on other acquisitive conglomerates like Danaher Corporation - a global science and technology acquirer of companies in diagnostics, life sciences, or the environmental and applied solutions industries – by targeting a broad range of acquisition targets and verticals that sprout from within its businesses and operating industries.

Roper can identify new verticals and act upon them quicker than other conglomerates by conducting more bolt-on acquisitions or expanding its existing businesses. Software is an increasingly critical piece of every company’s digitalization plans, and Roper capitalizes opportunities in the world of SaaS – the company has seen a rise in software revenues from 48% of total revenues in 2016 to around 70% today.

Asset-Light Nature

The rise of software as a percentage of total revenues has been constantly improving Roper's financial profile. The asset-light nature, high fixed-cost structure, and low capital requirements of these businesses benefits the company and its shareholders in two major ways:

  1. Absolute cash flows rise, opening the door to acquire more companies or reinvest into existing companies through capital expenditures or research & development.

  2. Cost efficiencies spur margin expansion and the ability to return cash flow to shareholders, reinvest into the business at more rapid rates, and acquire increasingly larger businesses if it chooses to do so.

Roper's capital expenditures as a percentage of revenues have been modestly declining since 2010 to a rate hovering around 1% of total revenues. FCF margins have also steadily risen over the last 10 years. Similarly, Roper's operating margin experienced a modest amount of expansion, boosting the bottom line.

Decentralized Management

In virtually all respects, Roper businesses operate independently within their own niche and with the passionate pre-acquisition management team and employee base intact. The only difference is a majorly positive one – the network effects of operating under the Roper umbrella. 

Roper constantly engages with leadership teams from each of its business to ensure each one:

  • is executing on its long-term strategy

  • has all the necessary resources in place to expand in existing or new markets

  • has coaching provided to execute on opportunities

The decentralized management system and Roper support system have a dual effect: (1) its existing businesses grow stronger and better over time, and (2) Roper learns from each experience to improve the next acquisition or a venture into a new vertical. 

Laser Focus on Quality

Roper avoids the common game that is targeting businesses that it already knows well. Instead, it does the opposite – it targets any company that is accretive to the quality of Roper's cash flow, has a management team that can thrive under the Roper umbrella and actively seeks to grow their business organically over many years, and is a player with high market share in a niche market.

Any business that does not meet the criteria above is rejected, but any company that meets the above criteria – from any industry – is fair game for an acquisition. The mere fact that the companies it acquires focus on smaller total addressable markets ("TAM[s]") results in an army of bulletproof business models with countless opportunities operating under Roper. Roper's disciplined capital deployment process is one that is envied by many professional allocators.

Opportunities Ahead

  • Roper has worked on reducing its leverage, a wide concern investors have about Roper. Aided by the sale of TransCore, Roper brought down its net leverage ratio (we calculate it as net debt over EBITDA) from 4.75x at the end of 2020 to 3.54x at the end of 2021. Following a slow year on the acquisition front, management hit the 3.5x or less net leverage ratio target to get right back into the M&A game.

  • Roper's management team is positive on the two key success factors for any serial acquirer - M&A capacity and number of considerable targets. Management has over $5 billion in M&A capacity over the near-term and a "robust pipeline" of considerable M&A targets.

  • Software is making up more of the revenue pie each passing year. Not only does this improve the quality of revenue generation and resulting earnings, but it also expands the scope of businesses Roper can buy in the field. Software is highly fragmented and region-based, especially niche software. As Roper learns software inside and out, we believe the company will get better at buying these sorts of businesses.

Risks

Cyclical Organic Growth Profile

Weak economic conditions could reduce demand for digitalization efforts and software solutions, products that are part of a growing mix of Roper's business and still seen as discretionary capital spend by many companies. Some of Roper's PT businesses serve the upstream oil and gas end markets, inherently gearing Roper to oil price volatility. Additionally, other products that are subject to discretionary budgets, like Roper's medical product and equipment offerings, see reduced demand in times of economic hardship.

Reinvestment Risk

Roper relies strongly on acquisitions to continue growing. Lack of a robust pipeline of acquisition targets, valuation / multiple expansion, or misjudgment of market or industry opportunities for an existing or desired business could result in lacklustre deals that dilute current shareholders or destroy value and result in greater-than-expected costs or an impaired divestiture.

Investment Competition

As a capital allocator, Roper faces competition from private equity and other large investment firms that may target high-quality businesses and assets like those that are aligned with Roper's strategy. Public assets are valued at higher multiples – and in some cases, to a significant extent – which increases general investment demand for private companies and assets to generate returns outside of the stock market.

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