This Downturn Will Stress-Test Roper's Differentiated Business Model

I’d been getting more comfortable with Roper Technologies’ (ROP) valuation recently, and the shares have held up extremely well so far this year, as the company’s strong recurrent revenue model is likely to see the company pass through this downturn with far less disruption than its industrial peer group. The question remains whether industrials are really a valid peer base anymore, but I don’t expect that to constrain the stock’s popularity.

My model assumes significant ongoing M&A, and there is now increased timing uncertainty on that, but I see little to disrupt the basic model. With an ongoing focus on niche-type businesses with barriers to entry, low maintenance capex needs, and low overall asset needs, I expect Roper to continue generating excellent free cash flow margins and free cash flow growth, even though the shares do otherwise look expensive on its organic growth numbers.

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This Downturn Will Stress-Test Roper's Differentiated Business Model

Roper Technologies Looking A Little Wobbly Of Late

I don't write on Roper Technologies (NYSE:ROP) as often as I probably should; mostly because its collection of niche businesses makes it something of a P.I.T.A. to conduct the in-depth due diligence that I like to do. That said, you can look at Roper as either one of the most complicated simple businesses or one of the most simple complicated businesses out there in industrial conglomerate land - there are a lot of moving parts, but they're unified by an overall commitment to defensible niches, good margins, and keen attention to the generation of re-investable cash flows.

In some respects, Roper today reminds me a little too much of Dover (NYSE:DOV) for comfort - a conglomerate being hit hard by energy, but with other worrying patches of weakness appearing. That said, the shares have beat the S&P over the past year and they don't really screen as "cheap." I'd need to bump my long-term revenue growth estimate by about 0.5% to get the DCF to today's price, but Roper does seem priced to generate high single-digit annual total returns from here and that's not exactly "bad" either.

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Roper Technologies Looking A Little Wobbly Of Late