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From the Survey: Roper
Roper Industries (ROP) is a diversified company that provides engineered products and solutions in software information network, medical, water, energy, and transportation markets. Following an 11-year hiatus, it began trading publicly for a second time in 1992 to raise capital for its acquisition and expansion campaign. After more than 20 years since its IPO, Roper’s stock price action has been remarkably consistent, as successful acquisitions have bolstered the top- and bottom-lines with regularity. Not surprisingly, ROP holds our highest score for Price Growth Persistence.
In the past, Roper Industries operated as an industrial company, while its main focus was on pump manufacturing. Then, in the early 1990s, the board decided to begin pursuing fields where higher growth opportunities could be found. Before this transition, the company expected its growth to approximate GDP rates. It was also heavily weighed down by capital expenditures, like most industrial equipment corporations. As it shifted from primarily a pump and fluid handling company to instrumentation and imaging niches, Roper transformed itself into a heavily technologically driven, engineered content provider.
Generally, Roper management likes to do one large acquisition per year. Furthermore, it targets only private companies that want to be acquired. These additions tend to be cash accretive from day one, with little reinvestment required. Unlike much M&A related activity, it is not buying for synergies. Instead, Roper goes after companies it thinks can increase present growth rates. Usually, existing management teams have already employed cost control measures, and the businesses are running efficiently.
Still, a crucial consideration for Roper’s purchase platform is the quality of management at the entity. This is vital because it keeps management teams in place, with the company’s brand name maintained. Even after the sale, the in-position managers continue to run their businesses. Now under Roper’s guidance, the managers have the tools to expand their business more quickly than they could on their own. Instead of setting budgetary constraints, Roper executives expect realistic, yet aggressive, forecasts from its business leaders based on attainable sequential and year-over-year performance. This way, the company allows managers to fund core growth and has plenty of cash and borrowing capacity left over to seek additional high-growth opportunities.
About ten years ago, Roper intensified its focus on asset-light businesses. Along with subscription-based recurring revenues, this has become a key differentiator for the company in the multi-industry sector. Relative to similar companies or the more typical equipment enterprise it used to be, ROP has very low depreciation. In fact, its business model requires minimal capital expenditures, running just 1.0% – 1.5% CapEx to revenue.
On the other hand, it records large amounts of non-cash amortization. Over $1.50 per share in amortization charges are recorded at the bottom line a year. Therefore, Roper believes amortization distorts its results to a degree, and the best way to view its performance is by cash flow per share, as opposed to the more prevalent earnings per share. Even though earnings have been healthy, it only paints part of the picture of how this company performs as a cash generator.
Roper’s margins are exceptional. Last year, it attained an EBITDA margin of 30.7%, and it aims to expand even further. All four segments have greater-than 50% gross margins and above 30% EBITDA margins. Indeed, ROP’s EBITDA margins rival gross margins at many other organizations. Also, all segments continue to exhibit positive trends. It sells direct to a diverse customer base, where no single customer accounts for more than $60 million in sales. Considering it recorded $3 billion revenues last year, investors need not worry too much about a customer loss creating any significant headwinds. The company looks to do acquisitions before buybacks and other methods of cash deployment, and Roper continues to search for asset-light businesses with recurring revenues. Now, more than half of its revenue is recurring, as subscription-based sales are becoming more prevalent in the Roper portfolio. Over the next 3 to 5 years, it will likely deploy up to $1.5 billion annually for acquiring new businesses. Recent acquisitions have boosted its Medical platform, and medical and software companies are likely targets in the future, as well.
Because of this cash deployment mentality, the dividend yield is decidedly below average. Therefore, these shares may not be of much interest to strictly income-seeking accounts; yet there is appeal for many other investment objectives. In all, Roper Industries’ shares are a solid choice for investors looking for capital appreciation with limited risk. For more information in regard to Roper’s prospects, as well as the particular investment merits of the stock, subscribers are encouraged to check out our full report in The Value Line Investment Survey.
At the time of this article, the author did not have positions in any of the companies mentioned.