Roper Earnings: Higher Rates May Be Blessing in Disguise in M&A Market
We maintain our $530 fair value estimate following wide-moat Roper Technologies’ ROP exceptional first-quarter earnings report. Management raised its full-year guidance on both the bottom-and top-end of the EPS range, to $16.20 at the midpoint (a 15-cent raise). Furthermore, Roper also raised its organic guide by a percentage point on both the bottom- and top-end of the range to 6.5% at the midpoint. During the quarter, total revenue rose nearly 15% to $1.47 billion (8% organically), while free cash flow rose about 4% to $445 million, year on year, or about 14%, excluding a legal settlement. The legal settlement was unusual and truly one-time, given that it was related to a patent dispute for certain sales dating as far back as 2004.
Perhaps most impressively during the quarter, the technology enabled products segment saw organic revenue increase 14%, coupled with an adjusted EBITDA margin increase of 50 basis-points. Roper’s water meter business in Neptune Technology Group boasted record revenue and backlog, with increasing momentum for ultrasonic meters, which are multiples more accurate than analog devices and help utilities avoid wasting water.
While second-quarter guidance looks reasonable, the full-year guidance looks conservative as it implies Roper will slow down relative to historical trends. We don’t think this will happen, given the resiliency of Roper’s business model, despite the difficult macroeconomic backdrop. A business like Neptune, for example, is typically tied to fixed customer budgeting and not to broader economic trends. Consequently, we model at the top end of the revised organic top line and adjusted EPS guidance. We offset these benefits in our model, however, after revisiting our long-term unannounced M&A assumptions.
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