It was August of last year when I called Roper Technologies, Inc. (NASDAQ:ROP) a great software conglomerate which had made another great move. Roper has actively managed its portfolio of activities, having increased its focus on software with the passage of time.
At the time, the company had closed on a $1.38 billion deal to acquire Syntellis Performance Solutions, and this was just another chapter to add to the track record and strategy.
Following a solid third quarter earnings report and another typical bolt-on M&A deal in 2024, Roper looks to be doing just fine. Shares continue to be awarded premium valuations, rightfully so, as I wish that I could buy this great player on dips here.
A Leader In Niches
Roper is active in a wide range of software and engineered products businesses, holding leading positions in what are considered to be niche segments. Running and operating in a wide range of industries and activities is only possible with local management teams that have been given the freedom to operate and thrive.
Typically, these activities require limited capital spending, as such businesses are great assets to own over time, and Roper itself and generally has become more focused on software as time passed.
The quality and transition of the business has been picked up by investors, in fact, they have aggressively priced these qualities into the shares. A $40 stock in 2008 actually rose to the $500 mark in 2021, coinciding with quite some M&A activities at the time. This includes a $5.4 billion purchase of Vertafore in 2020, followed by a $2.7 billion divestment of TransCore late in 2021.
To put this valuation into perspective: Roper posted a 19% increase in 2021 revenues to $5.79 billion, with earnings reported at $14.18 per share. Needless to say, this resulted in sky-high valuations at around 35 times earnings, even as the company guided for continued growth in 2022.
Even as shares fell back to the higher $300s in the second half of 2022, shares recovered to the $500 mark in August of last year. In the meantime, the company posted 2022 sales at $5.37 billion and adjusted earnings of $14.28 per share, which does not show progress compared to 2021, but this came amidst the sale of TransCore.
The company saw solid momentum early in 2023, with the company hiking the adjusted earnings guidance to $16.43 per share for the year following the second quarter earnings report. Net debt of $5.2 billion was hardly an issue, with EBITDA trending at $2.5 billion per annum.
With 107 million shares trading at $500, the $52 billion equity valuation (or $57 billion enterprise valuation) still comes in at around 30 times earnings. In fact, operating momentum was used by Roper to acquire Syntellis Performance Solutions in a $1.38 billion deal (or $1.25 billion deal after factoring in the present value of tax benefits) to add cloud-based performance management and data solutions.
Despite the nice bolt-on deal, it was a 30 times earnings multiple in a higher interest rate environment which made me cautious, even as it was perfectly clear that Roper remains great quality here and a very dangerous stock to bet against, so I saw no reason to get involved just yet.
Solid Momentum, Another Deal
Since September, shares of Roper have gradually gained more ground and participated in the wide market rally, having steadily risen to current levels and highs around $550 per share.
In October, Roper posted strong third quarter results with revenues reported up 16%, on the back of 6% organic growth, complemented by M&A efforts. By now, full year adjusted earnings were seen around $16.64 per share, as net debt ticked up to $6.6 billion. On the back of the strong momentum, Roper announced a convincing 10% increase in its quarterly dividend, marking the 31st year in a row in which dividends were raised, although a quarterly dividend of $0.75 per share translates into a yield of just 0.5% and change.
In January 2024, Roper announced its next deal, as it has reached a $1.75 billion deal to acquire Procare Solutions, with net tax benefits having the potential to reduce the effective purchase price to $1.64 billion. Procare provides cloud-based software for the management of early childhood education centers, used by some 37,000 organizations.
With a $260 million sales contribution and $95 million EBITDA contribution, the deal does not come cheap, yet mid-teens organic revenue growth is very compelling and management is really given the benefit of the doubt here. Pro forma net debt of $8.4 billion will increase quite a bit, but remains comfortably below 3 times EBITDA. All in all, the deal will add about 4% to reported sales growth going forward.
And Now?
With earnings power trending in excess of $17 per share based on the fourth quarter (implicit) guidance, and Roper having a history of outperforming and more M&A growth being in the works for 2024, I can easily see earnings around $19 per share this year.
Even in that case, shares trade at 29 times forward earnings, a demanding multiple, but a very well-deserved multiple as Roper is real quality here.
With leverage ticking up a bit and the pace of M&A likely slowing down a bit here, I am still extremely impressed with the Roper Technologies, Inc. business and management, but hope to benefit from a setback which happens at times as well. For now, I have little desire to chase the shares here, even as Roper appears to have started 2024 well and remains an impressive operator.
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