Another quarter brings yet another strong set of earnings from mini-industrial conglomerate Roper Technologies (ROP 1.25%). While the industrial conglomerate business model is going out of style among large companies, Roper's management continues to demonstrate that its collection of asset-light niche businesses has the potential to generate strong returns for investors. Let's look at a good quarter and the full year and see how Roper plans more of the same for 2019.
Roper Technologies' fourth-quarter results: the raw numbers
You can see how good the quarter was by comparing the full-year headline numbers with the guidance given on the previous quarter's earnings call:
- Full-year organic revenue grew 8%, compared with guidance for an increase of over 7%.
- Full-year adjusted diluted EPS grew 25% to $11.81, compared with guidance of $11.69-$11.73.
While contemplating these numbers, it's worth remembering that Roper's guidance in February was for organic revenue growth of 4%-5% and adjusted diluted EPS of $10.88-$11.20. Clearly, management exceeded its own expectations in 2018.
Check out the latest Roper earnings call transcript.
Image source: Getty Images.
CEO Neil Hunn lauded the results in the press release " This is really a fantastic quarter. Revenue, EBITDA, net earnings, cash flow, really any measure you can look at was a record for both the quarter and the full year."
He has a point. Full-year revenue rose 11% to $5.199 billion, with pre-tax earnings up 15% to $1.571 billion. CFO Rob Crisci believes cash flow is the best measure of Roper's performance, and he was pleased to announce a 17% increase in full-year free cash flow (FCF) to $1.37 -- a whopping 26% of revenue.
Roper's cash flow generation
Analysts took the time to honor the memory of former CEO Brain Jellison on the earnings call, but his corporate legacy lives in the company's business model. Jellison fashioned the company over a 17-year tenure until he stood down as President and CEO for medical reasons in August. He died in November, and left a legacy of success and a much admired business model for the new CEO to inherit.
In a nutshell, Roper is an acquisitive company that buys businesses operating in niche areas that have asset-light characteristics and relatively high margins. All four of Roper's segments reported near 30% operating margin in the fourth quarter.
The businesses are run separately, but capital deployment decisions are made centrally. One key advantage of the model is that Roper's businesses tend to generate high cash flows, which is then allocated to buying more business, paying down debt, and returning cash to shareholders through dividends. It's been a highly successful strategy over the years.
Discussing cash flow on the earnings call, Crisci pointed out that Roper has negative working capital -- the cash a company needs to keep on hand to run the business. For most companies, that's usually a positive number, and therefore a drain on cash, but Roper's asset-light businesses mean that its working capital is negative and contributes to cash flow.
As Crisci pointed out on the earnings call, that means as Roper grows revenue, the company doesn't need to use cash from its balance sheet to do so. Roper's FCF has grown strongly over the years, because of low capital expenditure requirements and low to negative working capital, and net income converts to FCF at a high rate.
ROP Working Capital (Annual) data by YCharts
Roper's 2019 outlook
Management expects adjusted diluted EPS of $12-$12.40 in 2019, representing growth of just 1.6%-5%, but there's a negative-$0.25 impact from divestitures included in the guidance. That said, guidance for 2019 implies a clear slowing of growth.
|
Segment |
Full-Year Organic Revenue Growth Guidance |
Q4 Organic Revenue Growth |
Q4 Operating Profit (Millions) |
|---|---|---|---|
|
RF technology and software |
4%-6% |
10% |
$171 |
|
Medical and scientific imaging |
4%-6% |
10% |
$142 |
|
Industrial technology |
Low single digits |
8% |
$70 |
|
Energy systems and controls |
Flat to low-single-digit decline |
2% |
$57 |
|
Total |
3%-5% |
9% |
$440 |
Data source: Roper Technologies presentations.
Discussing the matter on the earnings call, Crisci said RF technology and software and the medical and scientific imaging segments were "mid-single-digit organic growth segments for the most part if you go back last year, and we expect much of the same for 2019."
Industrial technology and energy systems and controls both have substantial exposure to oil and gas capital spending, and given the decline in oil prices and a difficult comparison with last year, Hunn is modeling a revenue decline from Roper's businesses with upstream exposure.
However, he also noted that if "oil prices stay where they are or increase, then there could be positive levers in our model," which suggests Roper's guidance could end up proving too conservative.
Looking ahead
Investors will be hoping for more of the same from Roper in 2019, with a possible lift if oil prices improve. The company's cash generation and improving balance sheet means it can think about more acquisitions while continuing to grow cash flow.
