Corner of Berkshire & Fairfax Message Board

General Category => Investment Ideas => Topic started by: giofranchi on August 03, 2015, 03:11:35 AM

Title: ROP - Roper Technologies
Post by: giofranchi on August 03, 2015, 03:11:35 AM
Quote
Roper Technologies
Roper Technologies is one of the best capital allocators among industrial companies. Over the last 10 years, the company has produced an annualized shareholder return of 18% vs. the S&P 500’s return of 6%. Roper’s management team has created tremendous value by deploying in excess of 100% of its FCF to acquire asset-light, cash-generative growth companies with strong competitive moats.

Acquired businesses have flourished under Roper’s decentralized and entrepreneurial management approach. Business managers are equipped with ‘Roper Strategic Focus’ tools to expand market share and have strong financial incentives to improve operating performance every year. An emphasis on management continuity ensures that managers don’t trade long-term growth investments for short-term profits.

Roper also boasts the highest returns-on-capital and profit margins among multi-industry companies. Many business units have a high percentage of recurring revenue and very high market share in their respective niche markets. Roper’s organic revenue growth rate has averaged 6% over the last 10 years. Recent healthcare technology acquisitions including Sunquest and MHA have enhanced the group’s organic growth profile and reduced the cyclicality of Roper’s cash flows.

We are confident that Roper’s management team can continue to generate excess returns through a combination of capital deployment and operating excellence. We expect Roper to grow earnings organically at a high-single digit rate through the next economic cycle. If management is able to deliver on its target to deploy 100% of annual FCF, future acquisitions can potentially generate 7 – 8% annual earnings accretion. This combination positions Roper to compound earnings at a 15% CAGR, making Roper a continuing core position in our portfolio.
--Daniel Loeb, Q2 2015 Letter

From the website of ROP:
Quote
Roper is a diversified technology company. The Company enjoys leadership positions in diverse niche markets and serves a broad customer base. Outstanding operational execution results in superior profitability and compelling cash flow, which, in turn, is deployed to create shareholder value. This asset-light, cash-focused business model has produced consistent growth for more than a decade.

Jellison is 69 and could be at the helm for the next decade.

Cheers,

Gio
Title: Re: ROP - Roper Technologies
Post by: Phaceliacapital on August 03, 2015, 03:33:20 AM
I think the company is also a Pat Dorsey favourite.
Title: Re: ROP - Roper Technologies
Post by: berkshire101 on August 03, 2015, 07:56:51 AM
ROP has been on my watchlist for a while.  It's a fantastic company, one of those diversified industrials that has that platform/acquisition strategy.  However, it's always appears expensive, above 20 times FCF.  What's a fair price for this great business?
Title: Re: ROP - Roper Technologies
Post by: no_free_lunch on August 05, 2015, 11:05:34 AM
Another one that I have on my list and seems to be in the same general category (they buy up competitors and improve operating metrics in a boring industry) as Roper is Middleby (MIDD).  MIDD is something like a 600x since 1992.   If either ever has a significant price drop I would be a buyer.
Title: Re: ROP - Roper Technologies
Post by: Schwab711 on August 05, 2015, 11:31:41 AM
Another one that I have on my list and seems to be in the same general category (they buy up competitors and improve operating metrics in a boring industry) as Roper is Middleby (MIDD).  MIDD is something like a 600x since 1992.   If either ever has a significant price drop I would be a buyer.

If you have any useful info on MIDD then please start a thread. I think it would be really useful since MIDD is on my great company watchlist and they look phenomenal on paper. I know everyone uses their products (and not much more), but I don't know why (are they going to require constant innovation?).

I'm watching ROP now, but I still don't understand their advantage, if any exists. Management appears to be an excellent asset (should be added to excellent management team thread) but would their businesses be as strong without them?
Title: Re: ROP - Roper Technologies
Post by: kapilm on October 06, 2017, 10:06:55 AM
Has anyone looked at Roper Tech, industrial PE-style conglomerate? Not cheap by any measure but its a cash generating machine. Business model is similar to BRK with each of the subs operating independently. They focus on CRI (cash return on investment) similar to CFROI which looks like a great metric to evaluate businesses. Would be curious to hear any thoughts on this name. Thanks.
Title: Re: ROP - Roper Technologies
Post by: LongTermView on October 06, 2017, 04:21:26 PM
They came up for me on a screen but I haven't looked at them all that deeply.
Title: Re: ROP - Roper Technologies
Post by: scorpioncapital on October 07, 2017, 04:38:26 AM
Yes I've owned Roper for a while and they are a well run conglomerate. They remind me a bit of Danaher albeit more industrial software angle. I don't know how they'll do in the next recession but in the last one earnings fell off a ledge when others fell off a cliff :)

Title: Re: ROP - Roper Technologies
Post by: Broeb22 on October 08, 2017, 04:03:26 PM
I've attached some research I did 2 years ago on the business.

The CEO earns PE-type comp, but he also owns $600MM in stock, which I love.

They are not buying assets cheap at the outset, but I think their mindset is 1) they can improve margins in some cases and 2) most importantly, niche software assets can grow cash flows with slight organic tailwinds and a few points of pricing power annually. This feature of software businesses makes their CRI metric look very impressive.

I like the business and own stock. It's a little bit of Danaher, and a little bit of Constellation Software. Valuation is not cheap today, so not sure I'd be buying. But with a business that can probably compound at low-double digits going forward, you have to think about buying this compared to comps like Moody's or Dun & Bradstreet, where the businesses generate so much cash relative to ongoing investment needs. With those in mind, the stock is not so excessively expensive.

A big concern for me going forward is what the acquisition pool looks like, similar to what some say about CSU. Given some of the large mature software companies out there, the runway is probably long, but they're less likely to get any screaming bargains the larger their acquisitions get either.
Title: Re: ROP - Roper Technologies
Post by: villainx on October 08, 2017, 08:49:05 PM
Any metric particularly useful in looking at whether ROP is fair/over/under priced?  I long looked at ROP but couldn't figure on where is a decent valuation to start a position.
Title: Re: ROP - Roper Technologies
Post by: kapilm on October 09, 2017, 08:02:10 AM
Broeb22 - research note was very helpful. As the business scales up, it'll be definitely challenging finding new businesses which can contribute meaningfully. Portfolio rotation by shedding legacy industrial assets could be another option to improve the overall asset mix while also taking advantage of the higher valuations.

Title: Re: ROP - Roper Technologies
Post by: Liberty on May 21, 2018, 04:08:49 AM
$1.1bn acquisition: http://investors.ropertech.com/file/Index?KeyFile=393578639
Title: Re: ROP - Roper Technologies
Post by: Broeb22 on May 21, 2018, 07:46:52 AM
A little more detail on PowerPlan. While I wasn't sure before, it looks like end users tend to be accountants or more broadly the FP&A team within organizations.

FCF Multiple looks very rich...The company could be growing quickly, which would mean FCF should increase quickly, but there's not enough detail to know.

When you start making acquisitions at these prices, I wonder if a TDG-style special dividend begins to become more attractive?

PowerPlan, Inc. provides an integrated suite of asset-centric accounting, tax, budgeting, and analytics software
solutions for Fortune 500 companies in utilities, oil and gas, transportation, telecommunications, and mining
industries. It offers Charge Repository, which manages the interfaces between various sources of transactions,
including the general ledger, project accounting, and book depreciation; Budgeting and Project Management, an
integrated capital and O&M budgeting solution; Asset Accounting, an asset tracking and financial processing
solution; Property Tax, a property tax solution; Income Tax, a tax depreciation and deferred tax system; and
Lessee Accounting, a lifecycle accounting system for capital and operating leases. The company also provides
asset retirement obligation, depreciation studies, reimbursable and advances, and tax solutions. It also offers
integration design, training, and maintenance and support services. The company was formerly known as
Powerplan Consultants, Inc. PowerPlan, Inc. was founded in 1994 and is based in Atlanta, Georgia.

http://www.martinwolf.com/Websites/martinwolf/images/2.%20Tracker_2015/MW_Tracker_2015.2.16.pdf (http://www.martinwolf.com/Websites/martinwolf/images/2.%20Tracker_2015/MW_Tracker_2015.2.16.pdf)
Title: Re: ROP - Roper Technologies
Post by: Broeb22 on May 21, 2018, 08:03:53 AM
Sorry for the slow dribble of info...wanted to highlight customer base as of Thoma Bravo's acquisition. 80% of investor-owned utilities. I imagine ROP's thesis and likely Thoma Bravo's is to expand this product's penetration into many more capital-intensive industries.

PowerPlan Consultants delivers PowerPlant and PowerTax, the premier solutions for budgeting, project, asset, depreciation, and tax management for asset intensive industries. Today over 80% of the investor owned utilities in the United States use PowerPlant. The PowerPlant accounting and tax products optimize cash flow and asset recovery for both book and tax purposes under Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). The PowerPlant project and budgeting products build shareholder value for clients through the application of best practices in managing complex construction cycles across thousands of projects. Learn more about PowerPlan by visiting http://www.powerplan.com.
Title: Re: ROP - Roper Technologies
Post by: Liberty on May 21, 2018, 10:17:15 AM
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FCF Multiple looks very rich...The company could be growing quickly, which would mean FCF should increase quickly, but there's not enough detail to know.

When you start making acquisitions at these prices, I wonder if a TDG-style special dividend begins to become more attractive?

18.3x FCF for an asset-light business that dominates its niche, with 40% FCF margins, 70% recurring revenue and 98-99% retention rates, growing mid to high single digits is "very rich"?

Guess you're a deeper value investor than I am.

If it performs as expected and there are no huge bad surprises, I think it was a pretty damn good deal at that price.
Title: Re: ROP - Roper Technologies
Post by: Broeb22 on May 21, 2018, 10:43:58 AM
Yes it looks rich. A 5.4% FCF yield on a $1.1 billion purchase of a business with $150MM in revenue is not obviously a great buy.

What makes up those 30% non-recurring revenues and how high-margin are they?

Without more detail, it could be very cheap or could be a peak multiple of peak earnings; I just don't know.
Title: Re: ROP - Roper Technologies
Post by: Liberty on May 21, 2018, 01:23:04 PM
Yes it looks rich. A 5.4% FCF yield on a $1.1 billion purchase of a business with $150MM in revenue is not obviously a great buy.

What makes up those 30% non-recurring revenues and how high-margin are they?

Without more detail, it could be very cheap or could be a peak multiple of peak earnings; I just don't know.

That's a lower multiple than ROP, so I'm guessing you're not in this thread because you like the parent business...

Why are you valuing it like a bond? It's a business. Say you get a 5.4% FCF yield, and it grows like they claim, so mid to high single digits.

So that's say 5.4 + 5-9%

But that's revenues. This is a software business, so incremental margins are probably ˜70-80%, so you get a nice bit of operating leverage.

Roper runs with a few turns of leverage (they keep it investment grade, usually maybe 2.5x EBITDA), so you get a bit of lift from there too.

And since this business has basically no capex, high ROIC, all cashflow basically turns to FCF and in fact deferred revs mean that it throws off cash as it grows, it tends to command higher valuations than a business with a different profile.

As a standalone business it's actually less valuable because the cash can't all be re-invested and it piles up, dragging down performance over time, but inside ROP the cash is sent up to HQ for redeployment via M&A, and they have a good track record of that, so you can actually justify paying more for it inside ROP than as a standalone PE deal, IMO.

So with all that taken into account, I can easily see paths to 15-25% CAGR for an asset like this. Who knows what will happen, but it certainly makes no sense to me to value it like a bond, and if you're waiting to get a growing business of this apparent quality, of this scale, with a FCF yield of 15% or whatever, you'll either wait forever, or what you buy will have a huge fatal flaw that makes the run-off price justified.

As for the recurring vs. non recurring, if the blended FCF margins are 40% and the non-recurring is low-margin, then you can imagine the margins on the recurring stuff. But historically, this business started as a service business and later transitioned to software. So I'm guessing that part of the non-recurring is service stuff, but it's probably going down over time (another tailwind). Or maybe part of it just more transactional software stuff on top of the recurring stuff (a lot of licenses are like: $X/month + $Y per type Z action in the system).
Title: Re: ROP - Roper Technologies
Post by: Liberty on June 28, 2018, 04:54:35 PM
http://www.ropertech.com/sites/default/files/180628_%20Thermo%20Fisher%20Scientific%20Signs%20Agreement%20to%20Acquire%20Gatan%20from%20Roper%20Technologies.pdf

Looks like $ROP sold about 0.54% of its revenues for 3.3% of its market cap in cash. At a run-rate of 150m in FY18, Gatan sold for 6.16x sales and I’m estimating between 18-20x EBITDA. And it was one of their more cyclical businesses.
Title: Re: ROP - Roper Technologies
Post by: Liberty on August 24, 2018, 05:54:01 AM
http://www.ropertech.com/roper-technologies-appoints-neil-hunn-president-and-chief-executive-officer-succeeds-brian-jellison

Brian Jellison going to executive chairman because of health issue, Neil Hunn (COO) becoming CEO.
Title: Re: ROP - Roper Technologies
Post by: Broeb22 on November 02, 2018, 01:31:04 PM
RIP Brian Jellison.

http://www.ropertech.com/roper-technologies-announces-passing-executive-chairman-and-former-ceo-brian-jellison (http://www.ropertech.com/roper-technologies-announces-passing-executive-chairman-and-former-ceo-brian-jellison)
Title: Re: ROP - Roper Technologies
Post by: Liberty on November 02, 2018, 01:32:29 PM
Very sad news.

(https://www.businessobserverfl.com/sites/default/files/styles/sliders_and_planned_story_image_870x580/public/193749_standard.png)

Obit: http://www.legacy.com/obituaries/heraldtribune/obituary.aspx?n=brian-jellison&pid=190642046

Quote
in lieu of flowers, memorial contributions may be made to Dana-Farber Cancer Institute in memory of Brian Jellison to support cancer research and patient care at: Dana-Farber Cancer Institute, P.O. Box 849168, Boston, MA 02284, or via www.dana-farber.org/gift
OR the Kelley School of Business Shareholder's Fund, c/o IU Foundation, PO Box 6460, Indianapolis, IN 46206-6460. Please note in memory of Brian Jellison.
Title: Re: ROP - Roper Technologies
Post by: Shooter MacGavin on November 02, 2018, 05:48:04 PM
oh man.  that is so sad. 
Title: Re: ROP - Roper Technologies
Post by: Astrea on November 03, 2018, 01:20:32 AM
He was phenomenal - very sad to hear this.
Title: Re: ROP - Roper Technologies
Post by: Liberty on December 19, 2018, 01:30:11 PM
Selling imaging businesses to Teledyne for 220m:

http://www.ropertech.com/sites/default/files/181219_Teledyne%20to%20Acquire%20Scientific%20Imaging%20Businesses_FINAL.pdf
Title: Re: ROP - Roper Technologies
Post by: Liberty on February 01, 2019, 07:02:02 AM
Q4:

http://www.ropertech.com/sites/default/files/Roper%20Q4%202018%20Earnings%20Presentation%20FINAL.pdf

Quote
• Revenue +12% to $1.38B; Organic +9%
• Gross Profit +13%;
• Gross Margin +90 Bps to 63.5%
• EBITDA +12% to $496M;
• EBITDA Margin +30 Bps to 36.0%
• Earnings Before Taxes +14% to $435M
• DEPS +19% to $3.22
• Operating Cash Flow +26% to $464M, 34% of Revenue
• Free Cash Flow +27% to $447M, 32% of Revenue
Net-debt-to-EBITDA 2.5x
FY2019 guidance: Adjusted DEPS: $12.00 - $12.40, organic +3-5%
[but that doesn’t include any acquisitions, as usual]
Q1 2019 guidance: $2.74 - $2.80
“Guidance Excludes Impact of Future Acquisitions or Divestitures”
Title: Re: ROP - Roper Technologies
Post by: chrispy on February 01, 2019, 05:13:39 PM
What are the main contributors to their high margins? Is it just a blend of the high margins of each company? Does it have to do with their debt structure?

On the earnings call they briefly mention how negative working capital is beneficial to their returns. I am having trouble understanding that one. Can you shed any light on it?
Title: Re: ROP - Roper Technologies
Post by: Broeb22 on February 03, 2019, 07:28:40 AM
On negative working capital, that is a common feature of most software companies. Basically, you receive the money for rendering services before you render the services. Which is different from most of other businesses which need to invest in raw materials, inventory, etc. before they generate a dollar of sales. So, a negative working capital business is much more likely to be able to self-fund its growth. You're basically getting a perpetual interest-free loan from customers AS LONG AS you continue to grow. Similar concept to Buffett's idea of float.

If I earn 100% of my revenue January 1st, knowing that I'll earn 40% of that in cash flow, I can take that profit and reinvest back in the business on January 1, as opposed to needing capital to invest in building inventory on Jan. 1  in anticipation of sales.

Now, this sword cuts both ways, because while negative working capital is great when you're growing, it is a lot less fun if the business begins to shrink. You basically need to pay back that interest-free loan from your customers faster than your sales are decreasing. Conversely, a positive working capital business, such as a distributor, will be able to reduce inventory as sales decline. I found this out while researching MRC Global, an energy distributor, during the 2015-2016 oil downturn.
Title: Re: ROP - Roper Technologies
Post by: chrispy on February 06, 2019, 05:12:53 AM
Broeb, thanks for the clear explanation
Title: Re: ROP - Roper Technologies
Post by: Liberty on February 06, 2019, 06:14:29 AM
What are the main contributors to their high margins? Is it just a blend of the high margins of each company? Does it have to do with their debt structure?

On the earnings call they briefly mention how negative working capital is beneficial to their returns. I am having trouble understanding that one. Can you shed any light on it?

Broeb22 explained the negative WC well, so I'll do the margins:

They started out as a more industrial conglomerate that still had decently high margins because it focused on niche stuff where there isn't a ton of competition and where performance matters. If you're selling some kind of industrial pump, the buyer cares a lot more about reliability and performance than price, because if the pump fails, it might screw up their whole operation and they'll lose a lot more than the price of the pump. Or if you are doing structural testing on nuclear power plants, they care more about the results being accurate than saving a couple bucks, etc.

Over time they climbed the quality ladder by buying even higher non-industrial niche businsesses, lately mostly medical products and software, and application software (for law firms, construction planning, etc).

They also are good at improving operations over time. Their legacy segments that haven't had any acquisitions in many years are still improving their margins and reducing their capital intensity. They don't market it like DHR does with its business system, but they get the results.
Title: Re: ROP - Roper Technologies
Post by: AdjustedEarnings on February 06, 2019, 07:45:58 AM
Their process is excellent, much better than DHR in my view. Starts with acquiring well in the first place (the "making silk purses with silk" thing...). How they are compensating people, etc. is also much better than DHR. Jellison was a genius and it's really terrible that he's gone. People look for the next Warren Buffett among investor-type CEO... but Jellison was it... brilliant operationally and also for cap allocation. More like Malone than Buffett I suppose. And unlike Howley, ROP did not leverage crazily. I've had the opportunity to meet subsidiary leaders at both companies and I'm convinced ROP does it much better with better assets than DHR... though, of course, DHR is nothing to scoff at... it's waay better than your average company. You are really picking among winners here. If you have to pay the same multiple or even a little more, ROP >> DHR in my view.
Title: Re: ROP - Roper Technologies
Post by: chrispy on February 08, 2019, 02:57:40 AM
Thanks for all of the details! This is one I'll be keeping an eye on and investigating further
Title: Re: ROP - Roper Technologies
Post by: Liberty on March 04, 2019, 06:15:45 AM
Restructured segments:

http://www.ropertech.com/sites/default/files/190304_New%20Segments%20Press%20Release%20-%20FINAL.pdf

Quote
• Application Software - Aderant, CBORD, CliniSys, Data Innovations, Deltek, Horizon, IntelliTrans, PowerPlan, Strata, Sunquest
• Network Software & Systems - ConstructConnect, DAT, Inovonics, iTradeNetwork, Link Logistics, MHA, RF IDeas, SHP, SoftWriters, TransCore
• Measurement & Analytical Solutions - Alpha, CIVCO Medical Solutions, CIVCO Radiotherapy, Dynisco, FMI, Gatan, Hansen, Hardy, IPA, Logitech, Neptune, Northern Digital, Struers, Technolog, Uson, Verathon
• Process Technologies - AMOT, CCC, Cornell, FTI, Metrix, PAC, Roper Pump, Viatran, Zetec
Title: Re: ROP - Roper Technologies
Post by: Liberty on March 18, 2019, 01:53:53 PM
New acquisition:

http://www.ropertech.com/sites/default/files/190318_Foundry%20Announcement_Final.pdf

Buying Foundry for £410 million (all-cash), "Foundry is a leading provider of software technologies used to deliver award-winning visual effects and 3D content for the digital design, visualization, entertainment industries." (that's a new niche for them)

https://www.foundry.com

By my math they paid 7.13x revenue for it.

"Clients and partners include major feature film studios and post-production houses such as Pixar, ILM, MPC, Walt Disney Animation, Weta Digital, DNEG, and Framestore as well as automotive, footwear, apparel, and technology companies such as Mercedes, New Balance, Adidas, and Google."
Title: Re: ROP - Roper Technologies
Post by: khturbo on March 19, 2019, 09:06:56 AM
This must be a high growth / high margin business if they paid 7x sales for it. It will be interesting to see what types of companies they buy going forward to try to hit that kind of mid-teens IRR on their deals.
Title: Re: ROP - Roper Technologies
Post by: Spekulatius on March 19, 2019, 09:48:23 AM
ROP looks like one if the nifty fifties of our generation.
Title: Re: ROP - Roper Technologies
Post by: Liberty on June 10, 2019, 07:10:07 AM
Gatan deal is off because of UK regulators:

https://www.prnewswire.com/news-releases/thermo-fisher-scientific-and-roper-technologies-announce-termination-of-gatan-acquisition-300864264.html
Title: Re: ROP - Roper Technologies
Post by: peterHK on June 10, 2019, 07:42:48 AM
ROP looks like one if the nifty fifties of our generation.

Trades at a 3.6% FCF yield with a proven track record of growing that 10-15% per year through smart capital allocation. Doesn't seem that unreasonable to me.