ROP - Roper Technologies

[Liberty]

if anyone has the deck/report of the Hedgeye Roper short can you please share?

 

thank you!

 

I'd also be interested in seeing it. You can message me through the forum, and my DMs are open on Twitter.

[Liberty]

Q1: https://www.ropertech.com/sites/default/files/Roper%20Q1%202020%20Earnings%20Presentation%20FINAL.pdf

[Broeb22]

Q1: https://www.ropertech.com/sites/default/files/Roper%20Q1%202020%20Earnings%20Presentation%20FINAL.pdf

 

I thought the results were pretty strong, particularly given some weakness from the minor O&G-focused parts of the business.

 

If things stay slow for a while, I would expect ROP to be a prime beneficiary of additional M&A opportunities. 

[Liberty]

Q1: https://www.ropertech.com/sites/default/files/Roper%20Q1%202020%20Earnings%20Presentation%20FINAL.pdf

 

I thought the results were pretty strong, particularly given some weakness from the minor O&G-focused parts of the business.

 

If things stay slow for a while, I would expect ROP to be a prime beneficiary of additional M&A opportunities.

 

I posted some of my highlights from the transcript in this thread, they mention M&A a few times:

 

[chrispy]

Thanks for sharing

[HoosierInvestor]

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.

[Liberty]

ROP is the most expensive the stock has ever been on any metric

 

Why is past valuation relevant for a company that has changed this much over time?

[HoosierInvestor]

ROP is the most expensive the stock has ever been on any metric

 

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.

[Broeb22]

ROP is the most expensive the stock has ever been on any metric

 

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.

 

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.

ROP_Loeb_SZ_Pitch.pdf

[HoosierInvestor]

 

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

[Liberty]

ROP is the most expensive the stock has ever been on any metric

 

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.

 

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.

 

Indeed, they started buying better businesses after Jellison showed up in the early 2000s, and the transformational one for them was Neptune, I think. Software came later. For a while they were more focused on highly-engineered, capital-light, niche businesses. They had a more medical phase, and got some network businesses like Transcore's freight-matching unit, and more recently they started deploying a lot more of the capital in pure software stuff.

[Broeb22]

Reading Fortive's transcript last night reminded me of our discussion on Roper yesterday.

 

Fortive laid out their businesses in terms of COVID impact.

 

15% of the business they expect to grow through this crisis. Essentially all of those businesses are software assets that have been acquired within the last 3 years (Gordian, eMaint (not acquired recently), Accruent.

 

Most of the rest of their businesses they expect to be down 20-25% with 35-40% decremental margins.

 

Fortive in my opinion is embarking on a similar path that Roper started years ago, and it is one that will lead to a more resilient business and a higher valuation long-term.

 

What I think is missed by some when it comes to Roper is that they are a pretty active manager of their businesses, and their overall results in growing/maintaining the profitability of their businesses is impressive. In that regard, I see similarities between a company like Roper and other acquisitive companies like Danaher (and its many spinoffs such as Fortive) in that they make what they buy better i.e. faster growing, higher margin, and why I'm long-term bullish on what Roper can accomplish. 

 

 

[Liberty]

What I think is missed by some when it comes to Roper is that they are a pretty active manager of their businesses, and their overall results in growing/maintaining the profitability of their businesses is impressive.

 

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.

[HoosierInvestor]

What I think is missed by some when it comes to Roper is that they are a pretty active manager of their businesses, and their overall results in growing/maintaining the profitability of their businesses is impressive.

 

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.

[Broeb22]

For what it's worth, while Roper typically buys assets from PE firms, I don't think most of those PE firms actually create the "operational improvements" they discuss so much, so from that perspective, I don't think these software assets they are more recently purchasing have been completely optimized.

 

As an aside, I'm interested to see if Procore Technologies does in fact come public. They compete with Roper I believe via ConstructConnect, and filed their S-1 a month ago (it feels like a year!). They've been growing like a weed so there's some good info in there on how they run their business. They focus a lot on making the software really easy for owners of real estate/projects to use, as opposed to a focus on the contractors, if I remember correctly.

[Liberty]

For what it's worth, while Roper typically buys assets from PE firms, I don't think most of those PE firms actually create the "operational improvements" they discuss so much, so from that perspective, I don't think these software assets they are more recently purchasing have been completely optimized.

 

As an aside, I'm interested to see if Procore Technologies does in fact come public. They compete with Roper I believe via ConstructConnect, and filed their S-1 a month ago (it feels like a year!). They've been growing like a weed so there's some good info in there on how they run their business. They focus a lot on making the software really easy for owners of real estate/projects to use, as opposed to a focus on the contractors, if I remember correctly.

 

PE firms are good at cutting the fat. Roper is good at doing longer-term investments and culture improvements that PE firms won't do because their time horizon isn't that long.

 

On Procore, just today:

 

https://therealdeal.com/2020/05/01/construction-tech-startup-procore-shelves-ipo/?utm_source=dlvr.it&utm_medium=twitter

 

"The latest coronavirus casualty is construction startup Procore, which has shelved its recent plans for an initial public offering."

[BPCAP]

Did anyone ever get that Hedgeye short thesis on Roper? There was a lot of talk about it, but I don't that a report ever went out. Thanks for the help!

[Liberty]

Did anyone ever get that Hedgeye short thesis on Roper? There was a lot of talk about it, but I don't that a report ever went out. Thanks for the help!

 

Never found it ¯\_(ツ)_/¯

[jschembs]

For what it's worth, while Roper typically buys assets from PE firms, I don't think most of those PE firms actually create the "operational improvements" they discuss so much, so from that perspective, I don't think these software assets they are more recently purchasing have been completely optimized.

 

As an aside, I'm interested to see if Procore Technologies does in fact come public. They compete with Roper I believe via ConstructConnect, and filed their S-1 a month ago (it feels like a year!). They've been growing like a weed so there's some good info in there on how they run their business. They focus a lot on making the software really easy for owners of real estate/projects to use, as opposed to a focus on the contractors, if I remember correctly.

 

PE firms are good at cutting the fat. Roper is good at doing longer-term investments and culture improvements that PE firms won't do because their time horizon isn't that long.

 

On Procore, just today:

 

https://therealdeal.com/2020/05/01/construction-tech-startup-procore-shelves-ipo/?utm_source=dlvr.it&utm_medium=twitter

 

"The latest coronavirus casualty is construction startup Procore, which has shelved its recent plans for an initial public offering."

 

That's true with the massive PEGs who have to play in sandboxes generally dealing with underperforming public companies, but do you think that's true of typical middle market / growth equity investors - folks who ROP is more likely buying from? They bought Deltek from Thoma Bravo - don't think firms like Thoma are generally coming in to cut a bunch of superfluous expenses, but instead building out sales teams and systems to support growth.

[jschembs]

That being said, this is one of the few >$1 bn businesses I'd consider paying 10x revenue for, fabulous FCF generation.

[Sombunall]

MORN notes hint at what the short thesis may be:

 

Skeptics of Roper point out three criticisms: 1) Roper purchases businesses that have little strategic rationale with one another; 2) the company is starving its businesses for capital; and 3) the business model carries a lot of execution risk since the company will eventually run out of targets to purchase.

[Liberty]

MORN notes hint at what the short thesis may be:

 

Skeptics of Roper point out three criticisms: 1) Roper purchases businesses that have little strategic rationale with one another; 2) the company is starving its businesses for capital; and 3) the business model carries a lot of execution risk since the company will eventually run out of targets to purchase.

 

;D

[valueseek]

2) the company is starving its businesses for capital; - couldn't been much farther than what the actual model seems to be. Listening to them over the years they are all about increasing competitive intensities of their business longer term be it however that money is expensed - through capital/BS or expense/IS. Just my couple of cents

MORN notes hint at what the short thesis may be:

 

Skeptics of Roper point out three criticisms: 1) Roper purchases businesses that have little strategic rationale with one another; 2) the company is starving its businesses for capital; and 3) the business model carries a lot of execution risk since the company will eventually run out of targets to purchase.

[Broeb22]

I would also push back on the notion that they will run out of acquisition targets anytime soon.

 

Running the numbers this AM, if you assume high-single digit growth in organic cash flows, and cash flow growth via acquisition of 8%, ROP only needs to acquire companies generating $250 million or less in cash flows each of the next 10 years to get to 15% CAGRs. If there is one market that can probably support a continued acquisition program of that scale, its the software business.

 

It doesn't get any easier over time, as public market targets will begin to be the only fish large enough to matter, and they bring a whole host of cultural differences ROP will need to manage through. But the point is they are a long ways from even needing to worry about buying out companies in the public markets.

 

The bigger concern is can they pay reasonable prices along the way? $250 million per year is about $5 billion of acquisitions annually at 20x multiples. It will be interesting to watch how new management navigates this without Jellison steering the ship.

[Liberty]

Q2 2020:

 

https://www.ropertech.com/sites/default/files/Roper%20Q2%202020%20Earnings%20Presentation%20Final.pdf

 

 

Posted some of my highlights from the call in this thread: