Company Reports

We lower our fair value estimate for Roper Technologies to $480 per share from $560, following a transfer of coverage and our tempered outlook for the value add of future acquisitions on the assumption of higher average deal multiples. Nonetheless, we continue to view Roper as a high-quality, diversified technology company with a portfolio of leading businesses in niche markets with durable competitive advantages, underpinning our wide moat rating. At current prices, Roper shares trade in line with our updated fair value estimate on a risk-adjusted basis.

Roper Technologies compounds cash flow by acquiring leading businesses in niche markets with durable competitive advantages and redeploying excess cash to acquire additional businesses with incrementally higher rates of return. The firm has pivoted from a legacy industrial base to a diversified technology company dominated by sticky software companies with wide economic moats, including multiple firms with gross retention rates above 95%.

Roper acquires software companies with large amounts of deferred revenue. Large quantities of deferred revenue exist because many software businesses receive cash in advance of when services are rendered. Roper uses this cash to invest in businesses at incrementally higher rates of return. Its targets have large bases of recurring revenue in oligopolistic, niche markets with small total addressable markets. That revenue base is protected by strong moats that frequently post gross retention rates greater than 95%. Roper’s businesses typically don’t own their own infrastructure, which further contributes to its asset-light business model. Over 20 years, Roper’s net working capital as a percentage of sales dropped from 18% to negative 17%.

Roper acquires software companies with large amounts of deferred revenue. Large quantities of deferred revenue exist because many software businesses receive cash in advance of when services are rendered. Roper uses this cash to invest in businesses at incrementally higher rates of return. Its targets have large bases of recurring revenue in oligopolistic, niche markets with small total addressable markets. That revenue base is protected by strong moats that frequently post gross retention rates greater than 95%. Roper’s businesses typically don’t own their own infrastructure, which further contributes to its asset-light business model. Over 20 years, Roper’s net working capital as a percentage of sales dropped from 18% to negative 17%.

Wide-moat-rated Roper Technologies posted solid fourth-quarter results, led by impressive revenue growth in its application software and technology-enabled products segments. Fourth-quarter revenue of $1.61 billion and adjusted diluted EPS of $4.37 both beat consensus estimates. Guidance for full-year 2024 was weak, however, and called for modest mid-single-digit organic growth, which is a step down compared with the trailing three years. We maintain our fair value estimate of $560 per share, as the time value of money effects were offset by minor changes to our forecast.

Roper acquires software companies with large amounts of deferred revenue. Large quantities of deferred revenue exist because many software businesses receive cash in advance of when services are rendered. Roper uses this cash to invest in businesses at incrementally higher rates of return. Its targets have large bases of recurring revenue in oligopolistic, niche markets with small total addressable markets. That revenue base is protected by strong moats that frequently post gross retention rates greater than 95%. Roper’s businesses typically don’t own their own infrastructure, which further contributes to its asset-light business model. Over 20 years, Roper’s net working capital as a percentage of sales dropped from 18% to negative 17%.

Following wide-moat-rated Roper’s third-quarter release, we raise our fair value estimate to $560 from $540 on somewhat higher incremental margins and time value of money. We were surprised by the market’s dour reaction to Roper’s report. We’d counter that there wasn’t much to pick on in Roper’s latest release. Said differently, we think our long-term thesis remains intact. We think Roper operates a set of stable, vertical niche software companies. In turn, these businesses generate lots of cash that can be reallocated to value-accretive M&A opportunities.

Roper acquires software companies with large amounts of deferred revenue. Large quantities of deferred revenue exist because many software businesses receive cash in advance of when services are rendered. Roper uses this cash to invest in businesses at incrementally higher rates of return. Its targets have large bases of recurring revenue in oligopolistic, niche markets with small total addressable markets. That revenue base is protected by strong moats that frequently post gross retention rates greater than 95%. Roper’s businesses typically don’t own their own infrastructure, which further contributes to its asset-light business model. Over 20 years, Roper’s net working capital as a percentage of sales dropped from 18% to negative 17%.

Nothing in wide-moat Roper’s second-quarter results materially alters our long-term view. We raise our fair value estimate to $540 from $530. Despite modeling a slightly better near-term outlook, the raise is primarily due to time value of money. Most of Roper’s businesses performed as expected, though we did tweak our technology-enabled products’ expectations to the upside, thanks to continued resilience in Neptune (water meters). While stocks aren’t particularly cheap, Roper remains one of our better comparable picks among U.S. multi-industry names. We think of the firm as a high-quality cash compounder, with a large runway for success, that trades at slightly below fair value.

Roper acquires software companies with large amounts of deferred revenue. Large quantities of deferred revenue exist because many software businesses receive cash in advance of when services are rendered. Roper uses this cash to invest in businesses at incrementally higher rates of return. Its targets have large bases of recurring revenue in oligopolistic, niche markets with small total addressable markets. That revenue base is protected by strong moats that frequently post gross retention rates greater than 95%. Roper’s businesses typically don’t own their own infrastructure, which further contributes to its asset-light business model. Over 20 years, Roper’s net working capital as a percentage of sales dropped from 18% to negative 17%.

We maintain our $530 fair value estimate following wide-moat Roper Technologies’ exceptional first-quarter earnings report. Management raised its full-year guidance on both the bottom-and top-end of the EPS range, to $16.20 at the midpoint (a 15-cent raise). Furthermore, Roper also raised its organic guide by a percentage point on both the bottom- and top-end of the range to 6.5% at the midpoint. During the quarter, total revenue rose nearly 15% to $1.47 billion (8% organically), while free cash flow rose about 4% to $445 million, year on year, or about 14%, excluding a legal settlement. The legal settlement was unusual and truly one-time, given that it was related to a patent dispute for certain sales dating as far back as 2004.

Roper acquires software companies with large amounts of deferred revenue. Large quantities of deferred revenue exist because many software businesses receive cash in advance of when services are rendered. Roper uses this cash to invest in businesses at incrementally higher rates of return. Its targets have large bases of recurring revenue in oligopolistic, niche markets with small total addressable markets. That revenue base is protected by strong moats that frequently post gross retention rates greater than 95%. Roper’s businesses typically don’t own their own infrastructure, which further contributes to its asset-light business model. Over 20 years, Roper’s net working capital as a percentage of sales dropped from 18% to negative 17%.

Nothing from Roper Technologies' 2023 investor day alters our long-term view of the wide-moat-rated firm. Consequently, we maintain our $530 fair value estimate. There were few surprises in the March 21 presentation, which we consider a positive. We think Roper remains an improved version of a boring, decentralized, steady compounder that focuses on asset-light niche market leaders with strong free cash flow generation. These businesses benefit from large bases of deferred revenue, which in accounting parlance is booked as a liability.

Despite being range-bound since the summer of 2020, wide-moat-rated Roper Technologies' stock represents a decent risk/reward opportunity for long-term shareholders, in our view. The shares are currently trading about 19% below our fair value estimate of $530 per share. The points of resistance in the stock seem twofold. First, the capital markets appear to not be taking kindly to leveraged deals where the benefits accrue many years in the future. Second, others contend that Roper’s historical organic growth profile underearned its potential. We’re less concerned about the first contention, which we think is fallout related to rising rates and macroeconomic uncertainty. On the second point, we think the market fails to appreciate a few things.

Roper acquires software companies with large amounts of deferred revenue. Large quantities of deferred revenue exist because many software businesses receive cash far in advance of when services are rendered. Roper uses this cash to invest in businesses at incrementally higher rates of return. Its targets have large bases of recurring revenue in oligopolistic, niche markets with small total addressable markets. That revenue base is protected by strong switching costs that frequently post gross retention rates greater than 95%. Roper’s businesses typically don’t own their own infrastructure, which further contributes to its asset-light business model. From 2003 through today, Roper’s net working capital as a percentage of sales has dropped from 18% to negative 17%.

We don’t expect to materially alter our $530 fair value estimate following wide-moat-rated Roper Technologies’ fourth-quarter results, although we plan to re-evaluate after the company releases its 10-K filing. Fourth-quarter revenue of $1.43 billion readily moved past our expectation of $1.35 billion, and diluted EPS on a continuing operations basis of $3.92 exceeded our $3.82 estimate. That was offset by slightly lower organic revenue guidance than we were baking in before the announcement (5%-6% versus our expectation just south of 7%). Our long-term thesis is intact, and we think recent dynamics mostly affect the timing of cash flows, which doesn’t create meaningful swings in intrinsic valuation.

We see no reason to materially alter our long-term assumptions following wide-moat Roper’s third-quarter results. However, we lift our fair value estimate to $530 from $520 due to the time value of money. We’ve also incorporated management’s revised full-year 2022 guidance. We’re now modeling $14.13 of adjusted EPS on a continuing basis, or the top-end of management’s earnings guidance. This reflects our view that we think there’s some conservatism in management’s outlook.

Roper acquires software companies with large amounts of deferred revenue. Large quantities of deferred revenue exist because many software businesses receive cash far in advance of when services are rendered. Roper uses this cash to invest in businesses at incrementally higher rates of return. Its targets have large bases of recurring revenue in oligopolistic, niche markets with small total addressable markets. That revenue base is protected by strong switching costs that frequently post gross retention rates greater than 95%. Roper’s businesses typically don’t own their own infrastructure, which further contributes to its asset-light business model. From 2003 through today, Roper’s net working capital as a percentage of sales has dropped from 18% to negative 13%.

We see no reason to change our $520 fair value estimate following our review of wide-moat Roper's acquisition of Frontline. We’d already been incorporating unannounced acquisitions in our model. The 2023 EBITDA contribution from Frontline is only modestly lower than what we previously assumed for acquisitions. While Roper is acquiring better businesses than its core, it’s still paying up for these businesses and their corresponding earnings contribution. The all-cash deal values Frontline at $3.375 billion, or $3.725 billion coupled with a tax benefit of approximately $350 million. This implies Roper is paying just over 9 times revenue or just over 19 times 2023 EBITDA for Frontline.

Roper acquires software companies with large amounts of deferred revenue. Large quantities of deferred revenue exist because many software businesses receive cash far in advance of when services are rendered. Roper uses this cash to invest in businesses at incrementally higher rates of return. Its targets have large bases of recurring revenue in oligopolistic, niche markets with small total addressable markets. That revenue base is protected by strong switching costs that frequently post customer retention rates greater than 95%. Roper’s businesses typically don’t own their own infrastructure, which further contributes to its asset-light business model. From 2003 through today, Roper’s net working capital as a percentage of sales has dropped from 18% to negative 13%.