Roper Earnings: Despite the Market’s Tepid Reaction, We See a Solid Third-Quarter Result

Following wide-moat-rated Roper’s ROP third-quarter release, we raise our fair value estimate to $560 from $540 on somewhat higher incremental margins and time value of money. We were surprised by the market’s dour reaction to Roper’s report. We’d counter that there wasn’t much to pick on in Roper’s latest release. Said differently, we think our long-term thesis remains intact. We think Roper operates a set of stable, vertical niche software companies. In turn, these businesses generate lots of cash that can be reallocated to value-accretive M&A opportunities.

While Roper’s businesses exhibited broad-based strength, its technology-enabled products led the way in terms of organic growth, rising 10% year on year on that basis. Neptune, which is Roper’s water meter business, continued its momentum from earlier in the year. Based on management’s commentary on its backlog and order patterns, we expect this momentum to continue into next year. We’re also enthused that that business appears to be taking share.

Of course, Verathon is another contributor to segment organic growth, given the move toward single-use bronchoscopes from traditional reusable options because of infection control. We’ve read elsewhere that single-use equipment is also more convenient and has superior maneuverability, which we suspect is ancillary motivation for customer purchasing patterns.

On an adjusted EBITDA margin basis, Roper’s network business led the way, improving this metric by 185 basis points to 56.4%. DAT (formerly dial-a-truck, or Roper’s freight matching business) and Loadlink have realigned their cost structures to meet current levels of demand, and they’re ahead of plan.