ROP

Roper Technologies

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-$65.35 -14.67%
Roper, A Truly Silent Compounder
While many may recognize the company from their washers or dryers Roper Technologies is a completely transformed company. Long gone are the days of home appliances, now wholly focused on silently powering the world $ROP.

Roper has spent the last decade transforming its company from a cyclical industrial company to an infrastructure software business. With the sale of Transcore a few months ago Roper is now free of its most cyclical business and its go-forward portfolio consists of high-margin software businesses.

There are three kinds of businesses Roper owns.

Application Software - Naturally these are apps like Aderant, which is kind of the Adobe CC of law firms. Clinisys, which operates software for hospitals to manage patient care better.

Network Software - ConstructConnect is building a platform for connecting every type of builder from general contractors, to architects and designers.

Tech Enabled Products - Neptune Systems makes tech-enabled water meters and testers for thousands of utilities across the country.

These are just some of the businesses that Roper owns, and the list is growing every year. With a heavy focus on recurring revenue, it now makes up over 50% of Roper's revenue. This transition has also driven the company's gross margin steadily higher, from 54% in 2012 to 67% in the last year.

Roper is quite clearly a serial acquirer, which means what it acquires is really important so let's take a look at the two latest acquisitions.

Vertafore - A sticky cloud-based company developing software for insurance companies. It was acquired for $5.35b cash.

Frontline Education - The most recent purchase for Roper is school management software. From attendance to scheduling and hiring Frontline is another super sticky business. It was acquired for $3.7b.

These two rather large purchases highlight the kinds of companies Roper is trying to acquire. Frontline especially, once Frontline gets in a school and all the teachers get used to the system it would be incredibly hard for that school to switch to anything else even if something better came along. Vertafore is much the same way, it's a very niche company built to streamline property and casualty insurance, I find it unlikely for a disruptor to try and enter the space given its relatively small size.

Switching pace a problem some acquirers run into is piling on too much debt making acquisitions and being forced to sell off core assets to pay that debt ($T). Roper uses debt quite well, however.

Despite the significant increase in Q3 of 2020 debt has been on a downward trend and cash has been soaring. This cash inflow of course came from the Transcore sale. This system of making big acquisitions and then quickly paying down the debt has allowed Roper to have a pretty stable Debt-To-Equity over the last 10 years.

Roper is also already a dividend aristocrat, having paid and grown their dividend for 29 years. Despite this, their payout ratio remains at a staggeringly low 15.7% even after growing their dividend, on average, by 12% per year over the last 5. So if dividend investing is your thing a high-margin sticky software business that's growing its payout by double digits would be right up your alley.

Going back to the actual numbers Roper has consistently put up double-digit growth over the past few years. Pulling from the 2021 investor presentation revenue, EBITDA, and free cash flow are all consistently higher.

And what's more important is Organic Revenue is higher. Organic Revenue growth is another thing to really pay attention to, acquirers can sometimes hide the fact that their core revenue is falling by making more acquisitions. But this is not the case, FY/FY revenue is up as well as organic revenue.

In closing, I would like to talk about valuation. With a price to sales of 6.7 and a price/5yr free cash flow of 28 Roper is not exactly cheap.

But given its recent YTD performance of -20%, I believe the company is getting to an attractive price. I believe that the attractive price is around $300/ share.

So while it might still be a little wait I believe Roper presents an incredible opportunity for owning a sticky behind-the-scenes software business that is still consistently growing revenues both through acquisitions and organically. That's why it is my pick for the September Idea Competition.
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I am loving the fact that so many pitches in this comp are companies that I have never heard of before and ones that might be considered "boring". Nature is healing and I dig it.

Sticking this one on my watchlist, thanks D&S!
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The Spinoffs of Sears
While the original company is long gone Sears had some pretty impressive spinoffs during its time as a public company. Several are still public Allstate $ALL, Morgan Stanley $MS, Lands End $LE, and Discover $DFS.

Another important company that came out of Sears was Roper $ROP, while not spun off Roper reinvented its business under Sears.

Such a crazy graphic.
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Whoa, I had no idea that $DFS was once a Sears subsidiary. There's some great nostalgia happening on the left side of this graphic :)
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James Andrews's avatar
$15.9m follower assets
What I did this week
A reasonably quiet week trading wise but a solid week for the portfolios with some nice gains across the board. Monthly wrap up to follow later this weekend. I have a 10 year reunion for a team sports championship we won in 2012 so unlikely to be in any condition to crunch the numbers today or tomorrow :)

Income Portfolio: Opened new positions in $DVN and $LCII . Collected dividends on $ROP $OZK $AFG and $CMCSA . Trimmed $PCAR with a view to being all out over the next few weeks. Sold all $JEF for a negligible gain.

Growth Portfolio: Added $SWAV to my portfolio holdings. Up 25% on my $ETH.X purchase last week. I will be keeping a close eye on this and have set a tight trailing SL.

Speculative: Nil activity once again but $MARA had a nice bounce as did $NOTV
New Lows Today @ 10am
Visit highsandlows.substack.com to see more
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Featured earnings for the week of Oct 18
Earnings season (finally) getting into full gear!

So many interesting companies announcing earnings next week. Here are is the Fincredible Featured list. View all here.

Here are some I own / or particularly interested in

$JNJ - very interested to see results in the medical devices segment. Specifically are their signs of closing the gap with $ISRG with their new platform and are elective surgeries coming back

$ISRG - flip side of the $JNJ narrative. I love it when competitors announce close to each other :)

$NFLX - international subscriber numbers

$T - update on discovery spin-off, dividend and 5G capex

$XM - $MNTV is my top 3 holding based on thesis they are making inroads in enterprise market, which $XM dominates. Big enough market for both but want some context.

A few companies like $PG on inflation numbers, but I suspect @awallis will be kinda enough to provide a MacroTalk update on this topic again

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