EUR 850.00 For Business Accounts Only

Morningstar | We're Convinced Roper's Impressive Run Will Continue Post-IR Talk and Q1 Review

Roper is an acquirer of software companies with large amounts of deferred revenue. Large quantities of deferred revenue exist because many software businesses receive cash far in advance of when services are rendered. Roper uses this cash to invest in businesses at incrementally higher rates of return. Its targets have large bases of recurring revenue in oligopolistic, niche markets with small total addressable markets. That revenue base is protected by strong switching costs that frequently post customer retention rates of over 95%. Roper’s businesses often don’t own their own infrastructure, which further contributes to the asset-light nature of Roper’s business model. From 2003 to 2018, Roper’s net working capital as a percentage of sales dropped from 18% to negative 3%.Skeptics of Roper point out three criticisms: 1) Roper purchases businesses that have little strategic rationale with one another; 2) the company is starving its businesses for capital; and 3) the business model carries a lot of execution risk since the company will eventually run out of targets to purchase. We think all three of these criticisms miss the mark. First, we think Roper purchasing unrelated businesses is an advantage. While competitors frequently purchase targets to either eliminate competition or buy distribution, Roper screens all opportunities based on its assessment of adding to its long-term cash returns, a key reason we believe the stock has beat the returns of the S&P 500 by over 2 times since 2003.Second, Roper’s businesses don’t require capital to continue growing. We estimate that maintenance capital expenditure is only about 1% of sales. Even so, the company’s FCF conversion consistently hovers around 140%. Finally, capital allocation has been integrally tied to Roper’s culture since former CEO Brian Jellison took the helm in the early 2000s. The firm also does not try to extract aggressive synergy targets from acquisitions, choosing instead to focus on opportunity cost. Private equity also provides Roper with a continuous revolving door of potential investment opportunities. In sum, we believe Roper is poised to continuously compound cash for many years to come.