We came across a bullish thesis on Roper Technologies, Inc. (ROP) on Substack by D Invests. In this article, we will summarize the bulls’ thesis on ROP. Roper Technologies, Inc. (ROP)’s share was trading at $573.58 as of Feb 14th. ROP’s trailing and forward P/E were 39.97 and 28.82 respectively according to Yahoo Finance.
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Roper Technologies (ROP) is a prime example of a transformative, high-quality investment. The company, originally a cyclical oil and gas supplier, has successfully transitioned into a high-margin, asset-light business under the leadership of Brian Jellison. Since 2001, Roper has evolved into a leader in providing software and product solutions across industries like insurance, food, education, and transportation. Jellison’s vision, shaped by his experience at General Electric and Ingersoll-Rand, focused on acquiring small, niche businesses with strong management teams and leadership positions. This shift away from capital-heavy industrial businesses significantly reduced the company’s exposure to cyclical risks. As a result, Roper’s stock price surged by 1300% during Jellison’s tenure, vastly outperforming the S&P 500.
Following Jellison’s retirement in 2018, Neil Hunn, a long-time Roper executive, took over and continued the disciplined approach that had become the company’s hallmark. Roper’s decentralized structure, consisting of 28 businesses that operate with an owner-operator mentality, fosters a customer-centric culture and supports high gross margins. With more than 70% of its revenues being recurring and over half of its EBITDA coming from software-related businesses, Roper has built a resilient and growing business model. The company’s capital allocation strategy remains focused on acquiring smaller, high-margin businesses, especially those with stable and predictable revenue streams. Thanks to this strategy, Roper has generated over $2 billion in free cash flow, enabling continued expansion without overpaying for acquisitions.
Roper’s mergers and acquisitions (M&A) strategy is one of the key drivers behind its success. By targeting smaller businesses with low capital requirements and strong leadership positions, Roper has ensured that its acquisitions remain competitive and allow for strong customer retention. The company steers clear of high-risk, high-growth ventures, instead focusing on businesses with steady cash flow. This disciplined approach to M&A has allowed Roper to achieve outstanding capital efficiency, evidenced by its Cash Return on Investment (CRI) metric, which has exceeded 500% in recent years. This level of efficiency highlights Roper’s ability to generate substantial cash flow with minimal capital expenditures.
While Roper’s growth has primarily been fueled by acquisitions, the company also benefits from mid-single-digit organic growth. The company’s consistent capital deployment—between $3 billion and $4 billion annually—ensures that it will remain active in acquiring high-margin, recurring revenue businesses. Though predicting Roper’s future growth with precision is difficult, its operational efficiency and disciplined M&A strategy position it well for continued success.
Despite Roper’s strong business model and history of success, its current stock price presents challenges for value-focused investors. Using a traditional DCF model, Roper’s fair value is estimated at $346, representing a 35% discount from its current market price of $533. The IRR model, based on assumptions of 8% revenue growth and a 25% exit net income margin, suggests a target price of $479 to achieve a 10% return. While Roper remains an exemplary company with an outstanding corporate culture, its current valuation is not aligned with these models. Therefore, despite Roper’s long-term potential, investors may find it prudent to wait for a price range between $400 and $450, offering a larger margin of safety before making an investment.
Roper Technologies, Inc. (ROP) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 40 hedge fund portfolios held ROP at the end of the third quarter which was 38 in the previous quarter. While we acknowledge the risk and potential of ROP as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than ROP but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.