Roper Technologies: Great Business, Greatly Overvalued
Summary
- Roper Technologies is trading at a 31% premium to fair value.
- It is an S&P 500 Dividend Aristocrat and a leader in various fringe end markets in the industrial sector.
- It is a hold, but not a buy at present.
Roper Technologies (NASDAQ:ROP) is an appealing stock choice for a number of reasons. However, no stock should be bought at any price, and the price that Roper Technologies trades at currently is sufficient to disqualify it from consideration as an investment at this time.
At close of market on 04/30/2021, Roper Technologies traded at $446.44 per share. Chart generated by FinViz.
At close of market on 04/30/2021, Roper Technologies traded at a share price of $446.44 (only 2.04% below its 52-week high of $455.72) with a trailing price-to-earnings ratio of 49.68 based on trailing earnings per share of $8.99, and a forward P/E of 28.33 based on forward earnings per share of $15.76. The trailing P/E is significantly higher than the five-year average P/E of 30.48, though the forward P/E is slightly lower - indicating how earnings per share are expected to improve as we move out of the pandemic.
However, this does not mean that Roper Technologies is undervalued, and the fact that the current dividend yield of 0.50% is slightly below the five-year average dividend yield of 0.55% suggests the converse. It is, therefore, necessary to establish just what fair value for Roper Technologies is, and this will be done with a modified version of the valuation method laid out by David Van Knapp.
To determine fair value, I will first divide the trailing P/E by the historical market average of 15 to get a valuation ratio of 3.31 (49.68/15 = 3.31) and divide the current share price by this valuation ratio to get a first estimate for fair value of $134.88 (446.44/3.31 = 134.88). Then I will divide the trailing P/E by the five-year average P/E to get a valuation ratio of 1.63 (49.68/30.48 = 1.63) and divide the current share price by this valuation ratio to get a second estimate for fair value of $273.89 (446.44/1.63 = 273.89).
Next, I will divide the forward P/E by the historical market average of 15 to get a valuation ratio of 1.89 (28.33/15 = 1.89) and divide the current share price by this valuation ratio to get a third estimate for fair value of $236.21 (446.44/1.89 = 236.21). Then I will divide the forward P/E by the five-year average P/E to get a valuation ratio of 0.93 (28.33/30.48 = 0.93) and divide the current share price by this valuation ratio to get a fourth estimate for fair value of $480.04 (446.44/0.93 = 480.04).
Next, I will divide the five-year average dividend yield by the current dividend yield to get a valuation ratio of 1.10 (0.55/0.50 = 1.10) and divide the current share price by this valuation ratio to get a fifth estimate for fair value of $405.86 (446.44/1.10 = 405.86). Finally, I will average out these five estimates to get a final estimate for fair value of $306.18 (134.88 + 273.89 + 236.21 + 480.04 + 405.86/5 = 306.18). On the basis of this estimate, the stock is overvalued by 31% at this time.
That the share price has been bid up to this level is not surprising when one assesses the underlying business. Roper Technologies is an industrial firm which engineers and develops products and solutions, and designs and develops software. Roper divides its operations into four segments: application software (Aderant, CliniSys, Horizon, Strata); measurement and analytical solutions (Alpha, Dynisco, IPA, Northern Digital); network software and systems (DAT, Inovonics, Loadlink Technologies, SoftWriters); and process technologies (AMOT, Cornell, Metrix, Roper Pump).
This asset-light business model means that Roper Technologies has lower capital expenditures and higher margins. Its free cash flow of $543 million and its operating margin (trailing twelve months) of 25.89% illustrate the resultant profitability that Roper Technologies enjoys, as does the Q1 2021 figures that the firm reported, with revenue of $1.53 billion and net income of $289.0 million. These figures are an improvement on Roper's Q1 2020 revenue of $1.35 billion (a 13% increase) and net income of $240.3 million (20%) and are illustrative of Roper's profitability as reported over the past five years.
| Year | Revenue ($) | Net Income ($) |
| 2016 | 3.79 billion | 658.65 million |
| 2017 | 4.61 billion | 971.77 million |
| 2018 | 5.19 billion | 944.4 million |
| 2019 | 5.37 billion | 1.77 billion |
| 2020 | 5.53 billion | 949.7 million |
Figures collated from annual reports available on Roper Technologies' investor relations page.
Net income figures have fluctuated considerably, but that is the nature of an industrial firm. When the economy expands, industrials perform well. When the economy takes a hit, so too do industrials. And Roper is no exception to this rule, though it fares better than most due to how diversified its operations are: with forty-five niche businesses that hold leading positions in their respective end markets, Roper has proven itself resilient in bad times and thriving in good times.
Whether times are good or bad, Roper has been able to reward its shareholders as well. In the midst of COVID-19, shareholders have benefited from a 9.51% return on equity. Over a longer period, shareholders have also benefited from twenty-eight years of consecutively rising dividends, a record that makes Roper one of the S&P 500 Dividend Aristocrats. And with a payout ratio of 22.60%, it would seem that these dividend payments will continue going forward.
However, the balance sheet does give one pause at first glance. Long-term debt of $9.28 billion is only just offset by a net worth of $10.47 billion, while total current liabilities of $2.44 billion are only just offset by total current assets of $1.75 billion, cash on hand worth $308.3 million, and total accounts receivable of $1.13 billion. Given Roper's steady profitability, it is unlikely that the dividend will be in jeopardy, but it is possible that Roper's ability to consolidate its leading position in niche markets through acquisitions (such as the August 2020 all-cash acquisition of insurance software vendor Vertafore for $5.3 billion) may be stymied somewhat going forward.
Overall, however, there is no reason for existing Roper shareholders to divest the stock. It is a profitable company and a reliable dividend payer that has proven itself able to weather unfavorable economic situations such as the recent pandemic. However, with earnings per share growth of 9.70% projected over the next five years, prospective investors would be better off waiting for a significant pullback to fair value.
Valuation is important. If a stock's price exceeds its fair value, you get a lower dividend yield and lower total return for the duration of the investment. This is particularly so in the case of Roper, which only sports a puny yield of 0.50%. Even a buy-and-hold investor must be mindful of valuation, as circumstances may arise in the course of one's life which necessitate a sale to obtain funds, and selling at a reduced price to the initial investment is never a fun position to be in. That is practically guaranteed in the case of Roper today, as a 31% premium is too much to pay for any stock. In summary, it is a hold, but it is not a buy at this time.
This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
Recommended For You
Comments (16)
As Buffet once said, “You must pay up for quality.”
No immediate plans to sell.
