Chuck Akre (Trades, Portfolio) is the founder of Akre Capital Management LLC. He has been in the securities business since 1968 and continues to be the primary person responsible for his firm's investment advisory services and investment selection. He was named to Barron's "Top 100 Mutual Fund Managers" list from 2003-2006, one of only two small cap growth managers to make the list four consecutive years. Chuck Akre (Trades, Portfolio) employs a classic value approach in selecting companies for his portfolio. He likes to buy companies with strong business model demonstrating consistent earnings growth, high return on equity or high compound growth rate in book value per share. He also looks at the quality of the management.
Chuck Akre (Trades, Portfolio)'s portfolio turnover is remarkably low. His portfolio is also concentrated, with about 40 stocks, and his top ten holdings typically make up over 60% of assets. Roper Industries (ROP) is one of his top ten holdings. As of March 31, 2015, he was holding 1,219,446 shares of the company. Last quarter, he increased his position in Roper Industries by buying 73,056 shares of the company. The following chart shows his holding history in the company.
Roper Industries recently posted strong first quarter earnings. Its quarterly EPS was up 6% versus prior year while its revenues gained 4 percent. Operating cash flow also increased 22% to $260 million in the first quarter. Commenting on the results, Roper's CEO Brian Jellison said:
"Our businesses performed exceptionally well in the quarter, with record first quarter performance for orders, revenue, margins, net earnings and cash flow. Organic revenue increased 5%, with significant contributions from our RF Technology and Medical segments. As a result of strong operating performance and our continued growth in asset-light software, technology and services businesses, free cash flow increased 24% to $250 million."
Management also raised full year guidance for the company. They now project earnings of $6.75 to $6.95 per share, versus earlier outlook of $6.70 to $6.94 per share.
Roper Industries designs, manufactures and distributes medical and scientific imaging products and software, radio frequency (RF) products, services and application software, industrial technology products and energy systems and controls products and solutions. The Company’s operations are reported in four segments: Medical and Scientific Imaging, RF Technology, Industrial Technology and Energy Systems and Controls.
In 1Q FY2015, Roper achieved record performance in all key metrics: orders, revenues, net earnings, EBITDA and cash-flow. Organic revenue was up 5% versus guidance of 3% to 5%. The company's gross margins reached 60% while operating margins were up 190 bps to 28.7%. Free cash flow was also impressive at 28% of revenues. The company also expanded its medical platforms with three acquisitions. The company has a comfortable net debt-to-EBITDA ratio of 2.1. Management believes there is further scope to increase the company's leverage and plans to continue with inorganic growth strategy, particularly on the medical and software side.
Going forward, the company is expected to post record performance despite the fears around the macroeconomic scenario. Some investors seems to be worried that the company's business may be impacted because of the recent oil price crash. Roper does cater to Oil and Gas end markets through its energy and industrial segments. However, unlike previous cycles, when it was a big portion of the overall company, it is now a very small portion. The company's upstream business represent ~5%, while downstream and midstream represent ~9% of its total revenues. The rest of the 86% of the company is its medical, RF, software and water end markets.
While the upstream end market is expected to be down ~20%, Roper's pump business is likely to decline less as it will benefit from the new technologies that it launched and broader categories it introduced in the second half of 2015. In the downstream and midstream business, the company is likely to see modest growth. While there are signs that Oil and Gas companies are delaying their projects and Capex plans, most of Roper's products don't go in capex driven activities. So, the concerns surrounding the slowdown in Oil and Gas industry impacting Roper's business is a bit overstated.
Roper has guided for an EPS of between $6.75 to $6.95 for the full year 2015. The company expects organic revenue growth to be around 3% to 5% and operating profit leverage on incremental revenues to be around 40%. According to sell side estimates, the company's EPS is expected to grow 6.5% in the current year and 8.6% next year. It is trading at a forward PE of 22.77x. Out of nine analysts covering the company four are positive and have buy ratings, while five have hold ratings. I like the company given its good growth prospects.
