What happened
Shares in Roper Technologies (ROP 1.35%) rose 14.3% in February, according to data provided by S&P Global Market Intelligence. The move was inspired by a record set of fourth-quarter earnings, which capped off another strong year for the mini industrial conglomerate. To put it into context, full-year adjusted diluted EPS grew 25% to $11.81 when the company had started the year expecting $10.88 to $11.20. The performance was driven by full-year organic revenue growth of 8% when original guidance was for 4% to 5%.
So what
The results highlight the success of the company's business model and the potential for further improvement in 2019. In a nutshell, Roper is a highly acquisitive company that operates high-margin, asset-light businesses in niche markets. Given that Roper's businesses don't require much capital investment -- full-year capital expenditures of just $49 million represent less than 1% of revenue -- and its revenue is shifting toward more software-based subscriptions, the company's cash flow generation is exceptional.
In fact, free cash flow grew 17% in 2018 and now represents more than 26% of revenue, with working capital actually being a contributor to cash flow -- a testimony to Roper's ability to generate cash.
Check out the latest earnings call transcript for Roper Technologies.
Roper Technologies continues to be a prodigious cash generator. Image source: Getty Images.
For 2019, management is expecting 3% to 5% organic revenue growth and adjusted diluted EPS of $12.00 to $12.40, but there's upside potential if "oil prices stay where they are or increase," according to CEO Neil Hunn on the earnings call. Roper's smallest segments -- energy systems and controls and industrial technology -- represent nearly 30% of the company's revenue, and they both have some exposure to upstream oil and gas.
Moreover, the guidance excludes any impact of future divestitures or acquisitions. It's a significant point, because Roper tends to use its cash flows to acquire businesses with growth potential.
Now what
Looking into 2019, investors will be hoping for more of the same in terms of execution. The medical and scientific imaging and RF (radio frequency) technology and software segments are set for mid-single-digit organic revenue growth, but probably the most interesting aspect of its earnings will come from oil and gas and from acquisition activity.
The general outlook is for weaker upstream oil and gas spending in the first half of the year, with the conditions improving for the second half. Meanwhile, investors will be hoping Neil Hunn can continue the legacy of earnings-enhancing acquisitions developed by former CEO Brian Jellison.
