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Stock Analysis & Ideas

Roper Technologies Stock: Robust Business, Slightly Overpriced

Roper Technologies (ROP) specializes in manufacturing products such as medical and scientific imaging equipment, pumps, and material analysis equipment for various industrial applications.

The company’s Technologies segment also develops software solutions for the healthcare, transportation, food, energy, and water industries.

The company is a constituent of the Dividend Aristocrat Index, numbering 29 years of consecutive annual dividend increases. Furthermore, Roper offers robust expansion prospects, featuring a noteworthy track record of organic growth and a strong acquisitions pipeline.

That said, investors are likely slightly overpaying today for Roper’s, admittedly, quality traits. Accordingly, I am neutral on the stock.

Recent Developments

Last month, Roper reported its Q4 2021 results, recording another quarter of excellent performance. Quarterly revenues and adjusted EPS came in at $1.51 billion and $3.73, implying a year-over-year increase of 13% and 14%, respectively.

The company ended the year on a remarkable note. Specifically, Roper’s businesses achieved 9% organic growth, powered by Roper’s ongoing commitment to innovation and steady migration to its recurring revenue SaaS solutions.

Further, supported by its EBITDA expansion to 22% during the year, as well as its net debt decline of about $1.7 billion, Roper reduced its net debt-to-EBITDA ratio to 3.1. This is a massive improvement from 4.7 at the end of 2020.

I am particularly optimistic with regards to management’s encouraging comments, including signs that the company has headed into 2022 with strong recurring revenue momentum, healthy demand for its services, record levels of backlog, and bright market conditions.

Roper CEO Neil Hunn mentioned that Roper is well positioned for continued double-digit cash flow growth going forward, which is fantastic to hear.

In numbers, this translates to FY 2022 adjusted EPS of $15.25 to $15.55, including Q1 2022 adjusted EPS of $3.63 to $3.67, according to the company’s guidance.

Dividend & Valuation

Despite Roper’s extended and praised dividend growth track record, dividends remain only a fraction of shareholders’ total-return potential. The company’s latest dividend hike was by around 10% last November. In fact, Roper’s 10-year dividend CAGR stands close to an impressive 16.5%.

However, with dividends being only a fraction of earnings (the payout ratio stands close to 16% based on the current dividend and management’s guidance), the stock yields a tiny 0.53%.

The stock’s historically rich valuation has also contributed to such a low yield, as shares currently trade at a (forward) P/E of 28.4 based on Roper’s current price and the midpoint of management’s FY 2022 adjusted EPS outlook.

In my view, the stock is slightly overvalued at its current levels. Even if we were to assume growth in the low double digits going forward, Roper would be more fairly valued at a P/E close to 25-27. Not massive valuation headwind risks ahead, but certainly, the stock is not cheap either.

Wall Street’s Take

Turning to Wall Street, Roper Technologies has a Moderate Buy consensus rating, based on three Buys, three Holds, and one Sell assigned in the past three months.

At $507.57, the average Roper Technologies stock projections imply 15.9% upside potential.

Conclusion

On the one hand, Roper Technologies features multiple qualities, including key market positions in the niche markets it serves and reslilent, recurring revenues. The company generated solid results in its latest quarterly report, while management’s guidance is certainly optimistic.

That said, due to shares being modestly overvalued and the stock’s yield remaining at tiny levels resulting in capital returns remaining rather limited, I am neutral on the stock’s investment case for the time being.

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