Roper Lets Investors Look Under the Hood; Engine Running as Always

Nothing from Roper Technologies’ ROP 2023 investor day alters our long-term view of the wide-moat-rated firm. Consequently, we maintain our $530 fair value estimate. There were few surprises in the March 21 presentation, which we consider a positive. We think Roper remains an improved version of a boring, decentralized, steady compounder that focuses on asset-light niche market leaders with strong free cash flow generation. These businesses benefit from large bases of deferred revenue, which in accounting parlance is booked as a liability.

Nonetheless, from a business perspective, we consider the cash received in advance of services one of Roper’s greatest assets, because the company can redeploy this cash into higher-return businesses. We think the market misses that in a modestly higher-rate environment, internally generated free cash flow is an advantage. Roper’s natural merger and acquisition competitors in private equity are generally tapped out of the market without access to cheap leverage in the current rate environment. By contrast, most of Roper’s acquisitions are financed by internally generated free cash flow.

Furthermore, while private market valuations lag the public markets, they still follow them directionally, and broadly speaking, valuations have come down some. Even after the $3.7 billion Frontline Education acquisition, Roper continues to have over $4 billion in M&A capacity thanks to its internally generated free cash flow and an undrawn revolver. Its internal free cash flow should continue to grow and support its M&A program. Our confidence in Roper’s model remains high, given that the company has virtually eliminated any cyclically tied revenue and over 80% of the business now benefits from either recurring or highly reoccurring revenue.