EUR 850.00 For Business Accounts Only

Morningstar | ROP Updated Forecasts and Estimates from 02 Nov 2018

Roper's rebranding to Roper Technologies emphasizes its evolution from an industrial equipment manufacturer to an over $5 billion portfolio (based on trailing 12-month data) composed of more than 50 highly specialized equipment and software companies. Since its IPO in 1992, Roper has steadily amassed a collection of unique assets by sticking to a strict acquisition strategy. Target companies must command leading share in niche markets, enjoy 50%-plus gross margins, and maintain an asset-light business model. These criteria have consistently identified companies with strong competitive advantages that generate ample amounts of cash, as evidenced by an average free cash flow margin of 20% over the past decade. In recent years, an intentional shift in business mix toward highly scalable, asset-light software-as-a-service businesses have pushed free cash flow margins beyond 30%, a trajectory we believe will continue as Roper prioritizes M&A in the SaaS-heavy Medical & Scientific and RF Technology segments. Legacy businesses housed in the Energy & Controls and Industrial Technology segments exhibit higher asset intensity, but excess cash flows from these maturing business lines are redistributed across the portfolio to encourage profitable growth.Roper's highly acquisitive strategy leaves little room for operating error. We think finding the right management teams is as critical as portfolio selection. All of its businesses have a CEO who takes full profit and loss responsibility. Once a part of the portfolio, quarterly operating reviews ensure each business leader focuses on efficient use of existing assets, disciplined working capital management, and prudent reinvestment of earnings. This methodology has supported impressive shareholder value creation; however, it comes at a hefty price. Goodwill represents more than half of Roper's total assets, and while returns on invested capital consistently exceed its weighted average cost of capital from peak to trough, spreads are slim. That said, Roper's enviable record of margin expansion and free cash flow growth validates the merits of a disciplined M&A formula that we expect will continue rewarding shareholders.