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Morningstar | ROP Updated Forecasts and Estimates from 26 Jul 2018

We are raising our fair value estimate for Roper Technologies to $226, from $217. About $2 of the increase relates to adjustments for 2018 projections on the strength of recent outperformance (related to both the top line and margins), with another dollar for stage II growth assumptions, and the remainder due to the time value of money. Even as we are impressed by recent outperformance and management’s stewardship of the firm, we still view the firm as fundamentally overvalued, even considering its increasing shift toward becoming a software-industrial company. We also remain weary about the execution risk associated with its acquisition-heavy business model. Our new valuation places about a 20-times multiple on our adjusted forward earnings forecast, higher than most of the diversified industrials in our coverage.

Roper had another quarter of resounding outperformance, with revenue rising 13% to $1.30 billion; 9% organically. The shift toward software offerings is highlighted in its high growth relative to other diversified industrial names, and we believe the market’s valuation multiple reflects this shift. Growth was broad-based across all segments, with industrial technology particularly demonstrating strong organic growth of 18% on the heels of Neptune (Roper’s water measurement and automatic meter reading equipment business serving the North American water utility market).

On the call, management, made some interesting comments relating to Neptune’s wins and its value proposition. Specifically, customers are realizing they can keep their installed base intact while still moving into more collective technology that Neptune offers them. Other reasons for the industrial technology segment’s outperformance relate to meaningful share gains in the firm’s Cornell Pump business. One tailwind contributing to share gains relates to wins with rental companies. Roger Pump also was a contributor, and the firm pointed out that uplifts in margins are helped by the operating leverage they realize out of these businesses. Even as management expects the fourth quarter to face tough comps, we’re now projecting that industrial technology will grow in the low double-digits year-over-year for the full-year 2018. The firm’s book-to-bill ratio of 1.03 in the segment gives us confidence in this assessment.

The energy segment was another strong, double-digit growth performer worth mentioning. Energy grew 12% on an organic basis, and was propelled by a strong performance in upstream applications. Also worth noting, the compressor controls business has begun to make a turn after its previous underwhelming performance, which management found encouraging given it is a long-cycle business.

Finally, management raised its guidance for 2018, both on a top-line and adjusted diluted EPS basis. Organic revenue growth is now projected to be 7% (4%-6% previously), while EPS is projected to rise to $11.40-$11.56 ($11.08-$11.32 previously).