Roper Technologies

An adaptable company

Here on my blog or in conversations with other people interested in the stock market, I often bring up Warren Buffett's famous quote: "Only invest in a stock whose business you understand." In fact, I've made it my goal to use my website to introduce companies briefly and concisely, without going too deep into any balance sheet figures. I'm firmly convinced that you make smarter investment decisions once you've understood the business model of the company in question. With some companies that's easier for me, and with others the whole thing gets a bit more complicated and takes more time than originally planned.

And that's exactly what happened to me with Roper Technologies. But I'd rather publish a well-researched and accurate article a day late than a half-hearted article on time at 6:00 p.m. on Sunday. So at this point I ask for your understanding. But now on to today's candidate :-)

The history and business model of Roper Technologies Inc.

The story of Roper Technologies Inc. begins on February 8, 1855, in Springfield (Illinois), when George Denny Roper was born. As a child, he lost his left arm in a train accident and had to learn to cope with it. He demanded that his family and friends not go easy on him just because he had one arm. In fact, this train accident shaped his strong personality, and so George quickly became successful in business, too. In 1889, at the age of 34, he acquired a 50% stake in the Van Wie Gas Stove Company of Cleveland (Ohio) - a company that made powerful cast-iron gas stoves. Business went well until the USA fell into a severe economic depression in the early 1890s. The Van Wie Gas Stove Company also had to take on debt and went into receivership. Roper got the chance to keep running the plant and pay off the company's debts. Despite the difficult economic situation, he succeeded in doing so in 1894. But only 10 days after he had paid off all the debts, a fire destroyed the entire factory.

George, who by now knew how to deal with setbacks like this, didn't let it stop him and built up the Eclipse Gas Stove Company. Here, too, he initially focused on gas stoves, but quickly realized that he needed to diversify his business more broadly so as not to depend on the success of a single product. In 1901 he used the company's profits to build his own foundry. Five years later came the first acquisition in the company's history, the W.D. Trahern Pump Company. Founded in 1857, this company made various types of hand-operated gear pumps used in homes as well as on farms or ships. The new division did important pioneering work in developing new pumps and quickly became one of the most important suppliers to the fast-growing oil industry. His gas stoves had also become the undisputed market leader by then. In 1919, George brought all his companies together under the umbrella of his newly founded Geo. D. Roper Company. When he died in 1925, he handed over management of the company to his son Mabon P. Roper.

Fortunately, the company was solidly positioned to survive the Great Depression of 1929. During World War II, too, it managed to stay afloat by making pumps for navy ships and ammunition boxes. When Mabon died suddenly in 1942 at the age of 50, that ended the family's leadership of the company. Nevertheless, the Geo. D. Roper Company continued to develop superbly in the following decades. In 1957 it sold its successful kitchen appliance division and used the fresh capital to expand its industrial division further. Business was going brilliantly, and the company was able to keep growing and expanding into new business areas. When it went public on the New York Stock Exchange in 1992, it once again used the capital to buy up more companies. So today's Roper Technologies Inc. is a broadly positioned industrial/technology conglomerate that offers software solutions and technical products in a wide variety of industries.

How will Roper Technologies fare in the market in the future?

First, I'd like to briefly sum up the conglomerate's business model again. Roper Technologies has mainly specialized in the following four business segments: Application Software, Network Software & Systems, Measurement & Analytical Solutions and Process Technologies; within these segments, the company manages a large number of different subsidiaries, which in turn serve a broad range of business customers from a wide variety of industries. Roper's software solutions and services mostly focus on smaller niche markets, where they're often the leading provider.

Now let's take a quick look at the most recently published figures for the third quarter of 2020 (ended September 30, 2020). Adjusted revenue rose by one percent to $1.37 billion, and adjusted earnings per share were $3.17. Considering that industry is naturally suffering from the effects of Covid-19, these are really solid numbers. At the press conference, CEO Neil Hunn said they were very pleased with the company's continued strong performance, had once again benefited from the diverse and resilient business portfolio, and had even been able to keep growing in many markets. He also mentioned that the lab software applications of subsidiary Verathon were fighting on the front lines in the battle against the virus.

Without a doubt, Roper Technologies will keep looking for suitable and attractive acquisition targets in the future, too. Just recently, it added insurance software maker Vertafore to its portfolio for the hefty sum of $5.35 billion. It's great when Roper manages to keep growing steadily, but of course there's also the risk of paying too much for a company and maneuvering itself into trouble that way. But I'm sure Roper has some smart people who know exactly what they can spend on what.

Another risk is that Roper Technologies generates the majority of its revenue in its home country, America. Here I'd find it very desirable if the company diversified somewhat more broadly on a global level. According to the company itself, though, it's already working on this.

What about the dividend?

Since the IPO in 1992, investors have received a share of the company's profits in the form of dividends. Since then, the technology conglomerate has also managed to raise the dividend year after year. And at 18.9 percent, the dividend growth rate over the last 10 years is really remarkably high. As a long-term-oriented shareholder, you can live with the fact that the dividend yield is rather low at just 0.5 percent. The low payout ratio of 13.8 percent also leaves plenty of room for growth.

Conclusion:
The former gas stove maker has always managed to adapt to the times and build a broad portfolio through many smart acquisitions. Income investors will hardly be satisfied with this stock. But if you're looking for a promising, high-growth stock for your portfolio, you should be happy with Roper Technologies.