Roper Technologies Inc. (ROP, Financial) has enjoyed growing confidence among the gurus for more than a year now:
In the third quarter, Ray Dalio (Trades, Portfolio)'s Bridgewater Associates added 143.53% to its position, while Jim Simons (Trades, Portfolio)' Renaissance Technologies added 119.09% and Joel Greenblatt (Trades, Portfolio) of Gotham Asset Management added 92.23%.
Chuck Akre (Trades, Portfolio) of Akre Capital Management added only 10.31%, but had the largest guru position, with 1,913,645 shares, representing a 1.82% stake in Roper and 5.33% of his own fund's total assets.
Altogether, 12 gurus had stakes as of Sept. 30, and 10 of them added to their positions.
What is Roper Technologies?
In its latest 10-K, the company calls itself a diversified technology company, operating in four segments:
- Application Software, which takes in 10 companies.
- Network Software & Systems, with 12 companies.
- Measurement & Analytical Solutions, comprising 15 companies.
- Process Technologies, which includes nine companies.
The Sarasota, Florida-based company provides this information about its strategy:
"We pursue consistent and sustainable growth in earnings and cash flow by emphasizing continuous improvement in the operating performance of our existing businesses and by acquiring other businesses that offer high value-added software, services, engineered products and solutions that we believe are capable of achieving growth and maintaining high margins. We compete in many niche markets and believe we are the market leader or a competitive alternative to the market leader in most of these markets."
To simplify, at the expense of detail, Roper uses continuous improvement tools (and philosophy) to improve the performance of its existing businesses. It then uses the free cash flow from these businesses to acquire other companies, which then begin going through continuous improvement initiatives.
Some investors will find this approach reminds them of Danaher Corp.'s (DHR, Financial) successful strategy.
Competition
Since the company operates in more than 40 different markets, there is no shortlist of competitors. Instead, it has a company-by-company list of competitors, but they have one thing in common. As we saw above, the company believes it is number one of two in each of the markets it serves.
Fundamentals
Roper is listed as an Undervalued Predictable company by GuruFocus, meaning it has solid fundamentals and a share price below its intrinsic value.
Predictability
Five-star predictability means Roper is at the top of its class for consistently increasing its top and bottom lines. More specifically, that's revenue per share and Ebitda per share for the past 10 years. As this 10-year chart shows, through to the end of 2019, both metrics have increased steadily:
Note from the trendlines that Ebitda growth has consistently been higher than revenue growth.
Financial strength
The company receives a relatively poor ranking for financial strength:
Looking through the lines in the table we see several issues. First, it has taken on debt, giving it a cash-to-debt ratio of just 0.43. On the critical interest coverage ratio, Roper has enough operating income to pay its interest expenses 7.1 times over; that's adequate but not reassuring to potential value investors.
Neither the Piotroski F-Score nor the Altman Z-Score makes investors comfortable either. They're not really in the dumps, but many investors would want to see something better. A score of 4 on the Piotroski F-Score means the company has passed on four criteria and failed on five. This is what we find when looking at the details:
- Return on assets: Pass.
- Cash Flow Return on assets: Pass.
- Change in return on assets: Pass.
- Quality of earnings (accrual): Fail.
- Change in gearing or leverage: Fail.
- Change in working capital (liquidity): Fail.
- Change in shares in issue: Fail.
- Change in gross margin: Pass.
- Change in asset turnover: Fail.
Weak results also emanate from the WACC versus ROIC comparison. Its weighted average cost of capital is 6.61% while its return on invested capital is lower at 5.93%.
Profitability
Roper shines when it comes to profitability:
The operating and net margins both outshine their rivals in the industrial products industry and are somewhat better than their 10-year historical medians.
Much the same is true of both return on equity and return on assets.
Most impressive perhaps are the numbers on the three-year growth lines, the three bottom lines on the table. Revenue growth at 11. 4% is good, but when it generates even higher returns on Ebitda and earnings per share, that's very good. Presumably, Roper's continuous improvement is making its companies increasingly effective and efficient at what they do.
Dividends and share buybacks
Shareholders will have to depend on capital gains for their returns as there is only a small dividend and no share buybacks:
Even holding for five years isn't enough to get a dividend that yields more than 1%.
Valuation
Roper is called an undervalued stock because its share price is below its intrinsic value, yet the default discounted cash flow calculator shows the stock is overvalued:
As I explained in "An Undervalued Predictable Mid Cap," this occurs when the share price accelerates rapidly in recent years (as opposed to the 10-year period used by default in the DCF calculator). The growth rate for the past decade is 16.20%, while the average growth rate over the past three years was more than double that at 37.80%.
The share price grew from about $170 on Oct. 24, 2016 to about $420 at the close of trading on Jan. 20; that marks a 2.5-fold gain in just over four years.
In other measures, the GuruFocus Value chart and PEG ratio show modest overvaluation, while the price-earnings ratio is in the middle of the industry pack and shows Roper is not far off its own 10-year history.
Conclusion
Roper Technologies owns a diverse portfolio of companies, but those companies have one thing in common, which is the effective application of continuous improvement strategies. That has allowed it to methodically improve the performance of the companies and use their growing profits to fund acquisitions that can then begin the process themselves.
However, it also uses debt to fund its growth, which has resulted in a debt load and pulled down its rating for financial strength. However, its profitability is strong, while its DCF valuation suggests there is a margin of safety (assuming you calculate with growth values over the past three or four years rather than 10 years).
Some of the gurus have taken an interest in Roper in the recent past. Other investors with a growth orientation might follow suit if they like the company's story. For value investors, the debt and valuation uncertainty could be too much, while income investors must look elsewhere.
Disclosure: I do not own shares in any of the companies named in this article and do expect to buy any in the next 72 hours.
Read more here:
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- What Could a VMware Spinoff Mean?
- An Undervalued Predictable Mid Cap
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