Where Are We Now
Updated on: 11/7/2021
Roper is a technology company that grows through buying other niche technology companies mainly in software but also in the medical field and industrial technologies. We continue to like Roper’s diversification, focus on niche and capital-light software businesses, and decentralized management structure that allows each of its owned companies to operate independently.
Roper has a lot of debt, but it is paying it down quickly to get right back into the acquisition game. It paid off almost $2 billion of it since completing its 2020 acquisitions.
The acquirer is growing well organically. We think this is an attestation to Roper’s business selection. The company tends to acquire companies that are important in their niche.
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.
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.
Despite a highly-levered balance sheet and the slow organic growth experienced in 2020, Roper is deleveraging faster than expected and should attain a sub-3.5x net-debt-to-EBITDA ratio in time to be back on the acquisition train in late 2021 while organic growth is bouncing back with force.
Roper’s businesses are organized into four segments:
Application Software (“AS”)
Network Software & Systems (“NS&S”)
Measurement & Analytical Solutions (“M&AS”)
Process Technologies (“PT”)
Roper Revenue by Segment (Q3 2021)
Source: Roper Investor Relations
Roper is astonishingly diversified not only across a plethora of end markets, but also across the types of products and services offered throughout these industries. Except for the PT segment, Roper’s business segments are roughly equal in size and contribute materially to the bottom line.
The conglomerate also aims to be a market leader or top competitive alternative in each niche market where Roper’s subsidiaries operate. As a result of the company’s product and service complexity, applications expertise, and broad global scale, combined with a proven marketing and sales strategy and an innovative environment that fosters new product and service developments, Roper’s businesses maintain the #1 or #2 spots in virtually all the markets where they operate.
Through a combination of organic growth and growth through acquisitions, Roper has doubled its revenues since about a decade ago.
Roper Revenue ($M) (Q3 2021)
As part of its acquisition identification and execution process, Roper seeks businesses that can compound cash flow at above-average rates.
We believe Roper is executing well on this criterion – free cash flow (“FCF”) per diluted share has grown at low double-digit rates (surpassing revenue growth), showcasing management’s ability to compound capital over the long run by identifying and purchasing great businesses and reinvesting those acquired cash flows to do it all over again.
Roper Free Cash Flow per Diluted Share ($ / Share) (Q3 2021)
Roper Technologies’ history dates back to the early 1900s, when George D. Roper started the Geo. D. Roper Corporation in 1919 in Rockford, Illinois. The company began as a manufacturer of kitchen stove and gear pump products and lasted as this two-segment corporate structure until the late 1950s. These two segments were later split into two entities – (1) Geo. D. Roper became Roper Corporation and it continued to operate as a manufacturer of kitchen appliances, and (2) Roper Pump Company, the new entity, which focused on making pumps and other products.
Roper Corp. was eventually acquired by General Electric in the late 1980s after a fierce faceoff with Whirlpool for the kitchen appliance manufacturer. The Roper Pump Company continued to operate as a stand-alone company that later reorganized its operations and consequently changed its name to Roper Industries in 1981. Roper Industries was a relatively small company at first with aspirations to become a specialized international pump and controls manufacturer. This set the stage for the what the company is today – Roper Industries kicked off its aggressive expansion campaign by acquiring Amot Controls Corporation and several of its British and Swiss subsidiaries in 1990 for $28 million.
Roper Industries went public in 1992 to obtain funds for its expansion and acquisition plans. It continued its buying spree for several decades before changing its name to Roper Technologies, Inc. in 2015 to reflect its evolution as the serial technology acquirer we know today.
Roper is an acquirer, integrator, and operator of diversified technology businesses that design and develop software and engineered products. These businesses span many industries, including medical, radio frequency, construction, supply chain, insurance, water and gas utilities, industrial, research, education, and various other niche markets.
Subsidiaries under the Roper umbrella primarily operate independently under a decentralized structure. Roper believes its businesses operate more effectively in their niche areas if their management teams remain intact and maintain autonomy over their operations and resource allocation decisions, while using the power of Roper’s reach, financial strength, and in-house coaching and support programs to execute on market expansion opportunities.
Roper mobilized about $9.7 billion on business acquisitions between 2018 and 2020, including a mammoth $5.35 billion deal for Vertafore, Inc. (“Vertafore”), a property and casualty insurance software-as-a-service (“SaaS”) provider. As a serial acquirer, Roper combats potential earnings dilution and the roll-up of targets with a poor strategic fit under the Roper umbrella. Management, therefore, abides by a set of stringent criteria that ensure these targets offer high value-added products and services with their asset-light, high-margin business models. Roper generally scopes out players in niche markets that have long growth runways and excellent management teams that tend to be accretive to Roper at a rather rapid pace.
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.
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:
Absolute cash flows rise, opening the door to acquire more companies or reinvest into existing companies through capital expenditures or research & development.
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.
Roper Historical Capital Expenditures ($M) (Q3 2021)
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.
No Shortage of Opportunities
When Roper, a best-in-class allocator, is confident about the opportunities ahead, investors should pay close attention. Roper’s management team recognizes plenty of targets to acquire in the latter half of 2021 and will act accordingly to its disciplined capital deployment strategy to get deals done as the opportunities arise.
If interested in a particular target, Roper’s management will go out and begin meeting with the target’s management team well ahead of the final purchase. For instance, management first met with the Vertafore team 18 months prior to the acquisition closing in late 2020. Typically, management meets with targets at least 9 – 12 months prior to final purchase.
We believe that management indicating there are ample acquisition opportunities in the market up for grabs in 2021 sends a strong signal to shareholders that many deals will be done. If that is not enough, the pipeline remains robust after a ground-breaking year of acquisitions in 2020, when Roper acquired business worth a combined $6 billion.
Over the long run, management’s openness to a plethora of verticals and industries, even if Roper does not currently hold specific expertise in those fields, likely means there will be absolutely no shortage of opportunities. The world changing, and it’s changing fast. Roper’s decentralized structure and ability to identify profound niche markets should ensure the company is never falling behind, but instead, getting ahead and conquering.
Investors should not fear dilution either – Roper is immensely disciplined, and it tends to get a fair price for almost every business it purchases. For instance, Vertafore was purchased at an enterprise value (“EV”) of $5.35 billion and is expected to contribute $590 million in sales and $290 million in EBITDA in 2021. In a time of pervasive, heightened technology valuations, a purchase valuation of 9x EV / Sales and 18x EV / EBITDA for a business with almost a 50% EBITDA margin should instill investor confidence in Roper’s ability to repeat its capital deployment process hundreds of times over.
Roper Technologies Business Acquisitions ($M) (Q3 2021)
Roper likes to conduct its business lean and mean – when leverage (i.e., debt) gets too high for its liking, it refocuses its financial priorities to clean up its balance sheet before it goes on another shopping spree.
The massive $5.35-billion price tag on Vertafore certainly dented Roper’s balance sheet, raising its leverage ratio (defined as net debt divided by trailing twelve-month EBITDA) to almost 5x by the end of 2020.
Management appears to be on track for overachieving on its desired target of under 3.5x leverage. The acquirer has slowed down on the acquisition front to focus on delevering its balance sheet to get back in the game as soon as possible.
We believe Roper conducts its financial matters in the utmost prudent manner, consistent with its long-term strategy that calls upon consistently accretive cash flow opportunities. If leverage is too high, Roper’s ability to acquire great businesses may be impaired and that is something management is actively trying to avoid.
The speed at which Roper is deleveraging alludes to their financial strength. In fact, Roper would be able to fully eliminate its debt balance in about five years using its free cash flow.
Roper is a behemoth capital allocator, likely placing it in some of the highest percentiles in the world. Even if Roper must draw on revolvers or issue debt, it can quickly delever to get right back to doing what it does best – finding the next target, reinvesting in its current businesses, and then doing that all over again.
Recurring Revenue Model
Strong contributions and organic growth from Roper’s software businesses are driving the foundation of Roper’s high chances of success throughout the upcoming decade.
For one, SaaS provides a highly reliable recurring revenue stream with relatively low churn, especially given the fact that Roper’s businesses operate in niche markets as the #1 or #2 leaders in virtually all markets.
Secondly, Roper’s shift towards a business that is primarily made up of software subsidiaries drive margins higher and net working capital lower. As a percentage of annualized revenue, net working capital has declined substantially from 2005 into negative territory and continues to grind lower.
In simpler terms, negative net working capital in the context of a SaaS or primarily-SaaS business means that customers pay at the beginning of the contract period to use the product. Roper’s SaaS and licensing contracts typically last for one year, meaning that the company receives funds for a one-year contract up front from the customer. Negative net working capital can also mean the cash requirements of the business are low. Roper, as a conglomerate with most of its revenues coming from its software and solutions segments, can self-finance new deals at a relatively rapid pace compared with companies that sell products or impose contracts with cash payments spread over a period of time.
Lastly, SaaS and other software solutions are increasingly gaining momentum as companies and organization digitalize their processes to become more cost-effective, efficient, and better or more competitive and agile in their respective industries.
The AS and NS&S segments have grown revenues at high double-digit CAGRs. On a go-forward basis, management is expecting organic growth to accelerate thanks to the strength and durability of the AS and NS&S segments. In 2021, Roper’s organic growth is expected to be in the high single-digit range with second half organic revenue growth touching low double-digit rates.
At Stratosphere, we believe organic growth opportunities are plentiful, and they will most certainly be fueled by additional vertical expansion and more acquisitions in asset-light, cash-gushing businesses.
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.
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.
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.
Roper is a world-class capital allocator that stays true to its disciplined long-term strategy regardless of the current economic or market environment. The company relentlessly focuses on compounding cash flows to grow its existing businesses, expand into verticals, acquire the next high-quality company, and benefit shareholders.
Roper has a largely unmatched moat that has been established because of Roper’s ability to identify and execute in niche markets, host decentralized management that is committed to coaching and supporting its subsidiaries, and network effects stemming from the growth underneath the Roper umbrella.
The company has no shortage of growth and acquisition opportunities, and it is doing everything in its power to make sure it will be able to take advantage of all the best possible opportunities.