HoosierInvestor

Yeah, if you look at businesses where they haven't done any M&A for decades, they still keep increasing margins and lowering working capital and improving. A bunch of their old industrial businesses have 30%+ EBITDA margins. Great point. They are also very active in things like leadership developing and making their portfolio company exec's better managers. They're def not allocating capital and then just sitting on their hands.

There's an acquisition history included in the attachment, and I'm not sure how exhaustive it is, but based on reviewing it, I would disagree that they started buying software businesses in the early 2000's in any material way. I would say that they have been buying software businesses as a primary focus since maybe 2009-2010. And looking back at their historical P/S, the P/S ratio has been steadily increasing since around that time from 3x sales to around 5-6x sales now. Here's a full list of all M&A activity to date -- sorry for the small print. Looks like there were doing some smaller deals in 2001 time frame. To be fair, it was not disclosed how large those deals were. You can also look at old transcripts to get a sense of their thinking back then. For example, from 1q05: "I think what is attractive is capturing the customer and being able to get the recurring revenue from the technology sales, which are high margin, and then trying to win the full scope of services." Edit: Full software M&A to date, apologies 20200430_015449262PM_Deal_Summary_ROP-US.pdf

Why is past valuation relevant for a company that has changed this much over time? 100% agreed. ROP started really buying software companies in early 2000’s so we do have a decent bit of history here. They reached 50% recurring revenue in 2015 and are at 70% today. That mix will obviously continue to go up and maybe it is worth a higher and higher multiple as that transition continues.

Haven’t followed the name for long but just my 2c. ROP is the most expensive the stock has ever been on any metric and yet the operating environment it is going into is arguably the most difficult ever for its strategy. In my mental model, ROP is buying very FCF generative, high ROIC businesses that don’t grow organically all that much and investing their excess cash in businesses that grow more than the consolidated—and buying them at a fair price. For this to work, they need to continue to find businesses that fit that description for the compounding to work. The problem today is that private market valuations are nearly as high (or according to Cliff Assness, higher) than public market valuations and the market has realized the value of niche software businesses. Would love to hear some other thoughts because it is a business that is fascinating to me.