A Winner – Roper Technologies Leads in Many Niche Markets

Roper is a diversified technology company engaging in the designing and development of software and engineered products and solutions for a number of niche end markets. The company operates through application software (~29% of 2019 revenues), network software & systems (~29%), measurement & analytical solutions (~30%), and process technologies (12%) segments. It has a large global presence with sales outside the USA accounting for ~26% of 2019 revenue.

Roper Technologies operates 45 independent businesses and maintains a leading position in most of the markets it serves, given the technical sophistication of its products, applications expertise, and distribution and service capabilities. The company serves a wide range of industries in the residential, commercial, and industrial markets through direct sales offices, manufacturers’ representatives, distributors, and resellers. Roper has an asset-light and highly scalable business model and benefits from recurring revenues. The company is growing organically and through acquisitions.

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Revenue Growth & Market Exposure

Roper Technologies caters to a broad base of customers in the healthcare, transportation, commercial construction, food, energy, water, education, and academic research industries. It is highly diversified across markets and customers with no customer accounting for more than 10% of its sales. Roper Technologies operates a portfolio of 45 businesses having different business models and serving different end markets. The company maintains a leading position in many of its end markets, with a majority of its businesses having the #1 or #2 position in their niche market. Roper develops software, both as license and software-as-a-service. Most of the company’s products rely on proprietary technology and therefore, it has a wide portfolio of patents, copyrights, trade secrets, and trademarks.

Roper Technologies has been growing organically as well through acquisitions and is benefiting from acquisitions like Foundry and iPipeline. It also continues to divest businesses in order to strengthen the quality of its portfolio. The company’s focus on acquiring high-value software and network businesses is expected to drive future EBITDA growth. Roper’s operating units continue to expand new product and application development to satisfy customer needs.

Roper Technologies gave a good set of Q2 results. The company is witnessing strong demand for medical products and laboratory software due to the COVID-19 crisis. The Application Software and Network Software & Systems continued to generate a high level of recurring revenue and the application software business had better-than-expected license sales. The company’s process technologies business suffered a decline given its large exposure to the oil and gas industry. Roper Technologies has clocked an impressive compound revenue growth rate of more than 20% per annum in the last decade.

Dividends

Roper Technologies is a member of the esteemed Dividend Aristocrat club. 2020 marked the 27th consecutive year of dividend increases. Though its dividend yield is just 0.47%, the company has an ultra-low payout ratio of 13%. It last raised its dividends by 11% and its dividend has seen excellent growth compounding at the rate of more than 18% per annum in the last decade. Roper’s earnings have also compounded at more than 20% during the same period.

Roper Technologies has an asset-light, cash-focused business model that has produced consistent growth for more than a decade and does not require much capital spending. It further focuses on acquiring asset-light businesses operating in niche markets with high operating margin and cash flow. Business acquisitions have been an integral part of the company’s growth strategy with a solid history of successful acquisitions and integrations. Roper’s acquisition of iPipeline is expected to contribute ~$70M of after-tax free cash flow to its business. Roper Technologies’ focus on acquiring companies that generate excess free cash flow should also aid future capital deployment. The company should benefit from its active pipeline of high-quality acquisition opportunities.

Roper Technologies is expecting its full-year diluted EPS to range between $11.90 and $12.40. The management has been successfully transitioning towards less cyclical revenue streams, focusing more on software areas and generating strong recurring revenue. The company registered a 7% EBITDA growth and a 5% free cash flow growth in the last year. Roper has a consistent track record of generating strong cash flow. The company has successfully maintained growth across all significant financial metrics.

Source: Company Presentation

With a payout ratio of less than 20%, consistent cash flow generation, and a strong balance sheet the company should continue its dividend-paying streak in the future as well.

Competition

Roper Technologies competes in many niche markets. The company faces competition from both large and small competitors. In addition, it also competes with new competitors and new technologies or market trends. A few of the prominent names in the Specialty Industrial Machinery segment are Nordson Corp., Illinois Tool Works, Dover Corp., Emerson Electric, Pentair, General Electric, Cummins, etc.

Bottom Line

Roper’s focus on asset-light models, software businesses, and recurring revenues should pave the way for future growth. A reputation of an esteemed Dividend Aristocrat and low payout ratio, grants more room for expansion on one hand, while retaining enough cash for future capital deployments on the other.

Dividend Adjusted Charting by StockRover.

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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