Roper Earnings: Mostly As Expected, Though Exceptional Performance in Water and Healthcare

Nothing in wide-moat Roper’s ROP second-quarter results materially alters our long-term view. We raise our fair value estimate to $540 from $530. Despite modeling a slightly better near-term outlook, the raise is primarily due to time value of money. Most of Roper’s businesses performed as expected, though we did tweak our technology-enabled products’ expectations to the upside, thanks to continued resilience in Neptune (water meters). While stocks aren’t particularly cheap, Roper remains one of our better comparable picks among U.S. multi-industry names. We think of the firm as a high-quality cash compounder, with a large runway for success, that trades at slightly below fair value.

During the quarter, revenue rose 17% (9% organically) to $1.53 billion. The businesses demonstrated broad-based strength, but the technology-enabled products segment was the strongest. Its organic revenue rose a resounding 19%. This is the segment that’s traditionally been the least important to our long-term thesis. While we think it’s a strong long-term mid-single-digit grower, we don’t think it has the same long-term operating leverage as the more software-focused business, nor do we expect management to lean into the merger and acquisition market. Nonetheless, those businesses did exceptionally well, despite recessionary fears that have persisted for over a year. In fact, the water meter market tends to be quite predictable. Customers operate on fixed budgets, so Roper’s cyclical risk is minimized.