Roper Has Underperformed Recently, But The Valuation Argument Isn't Clear-Cut

 

One of the tricky things about investing in companies where the valuation has decoupled from the underlying financial reality is that sentiment can shift without much reason, and you really don’t know when it will come back.

There are definitely some issues with Roper (ROP) and some valid bear arguments, but the underperformance since my last article (about 36% relative to the broader industrial sector) has surprised me, even though I did think the shares were overvalued.

Whether this is a “buy the dip” opportunity really depends on your confidence in the business model. If Roper can maintain double-digit growth, the shares do seem to offer a FCF-based prospective return on par with other high-quality industrials. If growth is more likely to be in the mid-to-high single-digits, though, the valuation isn’t nearly so appealing. On top of that, Roper isn’t particularly well-leveraged to where we are in the cycle, nor to some of the more favored industrial themes right now.

 

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Roper Has Underperformed Recently, But The Valuation Argument Isn't Clear-Cut