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.

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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.

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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.

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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.
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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.

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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.

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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.

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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.

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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.
Conor Mac's avatar
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!
Dollars and Sense's avatar
@investmenttalk yeah, something i have noticed too, i recognize almost none of these companies.
Dave Ahern's avatar
Great writeup of this great biz. I feel like ROP is a little under appreciated for what a quality business they are. And I love what Neil Hunn has done keeping the culture alive there.
Joey Hirendernath's avatar
This is the first I am hearing of $ROP. Thanks for your pitch. There is a great level of insight and analysis all condensed into 750 words.

How would you say $ROP deals with its competitors, since you mention it is a serial acquirer would you say it’s a bit of a Pac-Man situation ?
Dollars and Sense's avatar
@joeyhirendernath I think a lot Ropers strength comes from the two dimensions of their businesses. The first being the variety. Its not just one type of software but a range of applications and platforms. The other is a lot of their businesses are very niche, small businesses. Big software companies probably aren't going to build a competitor platform to constructconnect because in the end its not going to move the needle in terms of revenue. And this is basically every business Roper owns.
The Thinking Investor's avatar
Are all their acquisitions via cash? What is there shares outstanding situation looking like? Any insights into the valuation of the two SaaS businesses they acquired? What kind of value were they getting?
Dollars and Sense's avatar
@thethinkinginvestor traditionally roper has used a mixture of mostly cash + some debt/ some shares to acquire businesses. This last few acquisitions have been all cash given their sale of Transcore.

Shares have steadily risen over the last 10 years and at first it confused me but given the high valuation roper has been given (p/s ~7 + ev/ebitda ~14) I view it as better than piling on debt for acquisitions.

As for valuation of Frontline it was bought at 19x 2023 est Free cash Flow. As for Vertafore is was acquired around 18x 2021 EBITDA. Both companies have roughly the same margin and that equates to 10x sales.
Joshua Simka's avatar
I think my grandparents had some Roper appliances. Remarkable how the company has transformed itself! Bigger than I expected, too, at almost $40B market cap. Any sense from management on how they decide about acquisitions? What's their hurdle rate for these software companies?
Dollars and Sense's avatar
@tomato one of the concerns I had with the company especially after the long term CEO passed away was managements ability to continue to make good acquisitions. And disappointingly they seem to be quite vague about how they acquire companies. Typically high margin software businesses that add value is really all management will say.

Its a valid concern for sure but I also think new management has done well in former CEO Brian Jellison's stead.
Sagar Vensi's avatar
I didn't even know this company existed. Thanks for this :)
Dollars and Sense's avatar
@stockado i get this a lot surprisingly. No one knows they exist.

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