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Why Roper Technologies Stock Soared in July

By Lee Samaha - Aug 7, 2020 at 4:14PM

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The company's business strategy has been vindicated in the current economic climate.

What happened

Shares in diversified technology company Roper Technologies (ROP -0.33%) rose 11.4% in July, according to data provided by S&P Global Market Intelligence. The move comes in line with an excellent set of second-quarter earnings released toward the end of the month.

With most other industrial companies reporting horrific second-quarter earnings, it came as somewhat of a surprise to see Roper report only a 2% year-over-year decline in its earnings before interest, tax, depreciation, and amortization (EBITDA) during the quarter. In a nutshell, revenue declined 2% in the quarter on a year-over-year basis, but management kept EBITDA margin flat at 35.3%.

A rising stock chart.

Roper's stock price has powered higher in 2020. Image source: Getty Images.

Roper's management is well known for giving conservative guidance, but even seasoned followers would have been surprised to see three of its four segments significantly beat the revenue guidance management gave three months ago. The application software business grew revenue 1% and generated better-than-expected license sales. Furthermore, management lauded the company's ability to implement software remotely.

Network software and systems grew revenue 2% in line with expectations. Meanwhile, management and analytical systems revenue only fell 1% when a mid-single-digit decline was expected. Two of the segment's businesses (surgical scrub equipment and bladder volume/airway management) received "exceptional demand" due to COVID-19, according to CEO Neil Hunn on the earnings call. Finally, the most cyclical segment of all, process technologies -- which contains heavy exposure to oil and gas -- reported a 26% decline compared to expectations for a 30% decline.

As a consequence, management raised its full-year earnings expectations to diluted earnings-per-share (EPS) in the range of $11.90 to $12.40, compared to $11.60 to $12.60 previously.

So what

The results help to underscore the moves that management has made to shift the business toward less cyclical revenue streams. Roper's strategy has long been to invest in asset-light businesses operating in leading positions within niche markets and coming with strong recurring revenue. The cash flows generated from these businesses is then used to acquire more businesses to the Roper portfolio.

Following this strategy has led the company into more and more software areas, and the resiliency of its revenue base can be seen in the second-quarter earnings. Simply put, the company has proved that its solutions are highly relevant to its customers within the niche markets they operate in.

Now what

Investors will be hoping for more of the same going forward. Roper's business model is definitely not broken, so why even attempt to fix it? Given the company's acquisitive history and its relative outperformance in a difficult economy, it's reasonable to expect some activity on the acquisition front. Indeed, during the earnings call CFO Robert Crisci said, "We remain very well positioned with significant financial capacity to take advantage of our large pipeline of acquisition opportunities." Something to look out for.


Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends Roper Technologies. The Motley Fool has a disclosure policy.

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Roper Technologies, Inc. Stock Quote
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