Episode 50 | Roper Technologies: Can Management Deliver on Margin Expansion?

In Episode 50 of “Market News with Rodney Lake,” Professor Lake, Director of the GW Investment Institute, analyzes Roper Technologies, an industrial operator turned high-margin software-as-a-service (SaaS) business. Under CEO Neil Hunn’s leadership since 2018, Roper has maintained gross margins around 70% and net margins near 20%, with projections suggesting an increase to 27%. Despite solid revenue and free cash flow, revenue growth has slowed from a peak of 15% in 2023 to a projected 8% in 2026. Lake cautions that Roper’s future performance will depend on whether management can effectively allocate capital—balancing acquisitions and organic growth—to sustain gross margins, expand net margins toward 27%, and justify a 28x valuation amid slowing revenue growth.

Transcript

Thank you for joining “Market News with Rodney Lake.” This is a regular program for the GW Investment Institute where we talk about timely market topics. I'm Rodney Lake, the Director of the GW Investment Institute. Let's get started. Welcome back to Market News with Rodney Lake. I'm your host, Rodney Lake. Welcome from Duques Hall right here in the heart of Foggy Bottom, Washington, D.C., the GW George Washington University School of Business.
Welcome back to the people who are watching our show on YouTube and listening on Spotify, Amazon, Apple. And welcome to any new viewers or listeners. This show, we're going to tackle a company that's in our portfolio for the GW Investment Institute. Our students manage around $10 million. Remember, not investment advice, educational and entertainment only here, but we review some topics in general.
But we're also reviewing companies that are in our portfolio, sometimes companies that are not. But today we're tackling a company that's in our portfolio. And that company today is Roper Technologies. And the ticker is ROP. This company's been in our portfolio for a while, has been making a little bit of a transition for itself. It's very much going from industrial to software.
And we're going to talk about that and we're going to evaluate this company using the BMPB, the business, management, price valuation and balance sheet, Investment Institute framework to review the company. So here we go to Roper Technologies. Again ticker is ROP. Let's get some basic stats underway here. So this company is a $60 billion company is the market cap.
So that market cap is not again the trillion dollar plus market cap. When we talk about some of the tech giants in the Mag seven, as as we do talk about but that's not a small company. And so a $60 billion market cap, that's a fairly large company. And so what does this company do? They're in the software business.
Right. And so they they really have transformed themselves, really, from an industrial company to a software as a service company. And that transformation has been underway for a few years here. And so how should we think about this company? Well, this is a specialty company. It operates in, you know, specialty lines. And really, it's in, you know, software that goes into manufacturing and health care and other verticals, that happen there.
And so it's important to note that it has been transforming itself. It's based in Sarasota, Florida. For anybody that wants to know where it's based and that the CEO is Neil Hunn. And when we talk about management, we're going to talk about that. But let's get some other stats underway here for the business. So but this business again, $60 billion market cap is the business.
And but now let's get to okay. Well, what's the revenue look like for this company? So if you look at the trailing 12 months, ending March 31st, the quarter, 2025, you have revenue of about $7.2 billion. So, again, not a not a small company. And the gross profit on that is about $5 billion. So really high, by the way, gross profit margin here of almost 70%.
And you can see, and we say, okay, well, let's look at this. Over time, that's been a pretty steady margin. And so from 2021, to now, the margin has actually compressed a little bit. It went from 70.5%. Now to 68.9%. Now the revenue has increased. It was $3.4 back in 2021. And now it's almost $5 billion.
But that margin has remained relatively high. And so that that I think is very important to note. But let's go back to the revenue for one second to talk about how has the revenue progressed over time and what are those growth rates associated with that when we're talking about the business? And we'll get to the gross margin back to the gross margins, and we'll certainly get to the net margin.
So but let's talk about the revenue. So from 2021 and we encourage analyst look, you got to take the time to say okay where is the company going. That's the primary focus. But you know it is useful to understand where where's the company been. Where is it gone? What is its trajectory? What have they done? What have they executed on, and what kind of growth have they achieved, as an example?
So back in 2021, these are full year, their calendar year and their fiscal year. The same thing. 12/31 they had $4.8 billion in revenue. And now, again, $7.2 so they have grown, excuse me. And they grew, from 21 to 22, 11% and 22 to 3, 15% and 4 to 5. That's almost 14%. And now for the trailing 12 months, you're talking about 13% with the full year projection at 11%.
So you can see that that growth rate sort of peaked out in 2023 at 15% and has been declining a little bit. And now it's back, heading towards, you know, more like 10%, in the out years. And so the projections for 2025 full year is 11%. And then if you look at the analyst estimates, consensus is under 8% for 2026.
And again, so you can see okay, well what's going on there. That's something that our analysts are going to have to track. And then if we're going to do a deep dive on this company, we would really need to understand. Okay, well, why do we think that the growth has peaked, at that point on revenue growth, not revenue peaked, but revenue growth has peaked, around 15% in 2023.
And what's management doing to tackle that? Are they doing something different or are they doing things the same way? Was that a series of acquisitions? This is something we would want to deep dive on it and make sure that, okay, what's the the out years look like? Can they recreate that type of growth? We would want to know that.
And we would want, to understand that. Next up we'll tackle the profit margin. So if you look at the profit margins I mentioned, even with those growth rates changing, in the increase in the revenue, the gross profit as actually the margins itself, percent wise, has stayed pretty constant. And so if you look at the gross profit margins from 2021 at 70.5%, and then it goes to 60%, it goes to about 70% for the next year.
And so it's really held up and it's been about 70% for all those years since 2021. That there's some variation here, 70.5%, 69.9%, 69.7%, 69.3%, 69.8% from 21 and forward. And it's really projected to stay around 69%, for the out years, too. And so that's very good. And those are very high gross profit margins. If you've been watching the show or listening to the show, you would know that that rivals some of the big tech companies and Visa and others. You would say, well, that that's relatively high because this company is producing software.
And so it is in the software as a service business, it's important to, to understand that. And that's going to give you insight into why those margins are so high here. And so they're quite good. So but then you look down at the net margins. Now they're not as impressive as tech companies, but they're relatively good. So if you look at the net margins, for the last, again, trailing 12 months through March 31st, 2025, 19.6%.
So if you say 20% and it's been 19.7%, 19.6%, 20.1%, 19.7%, that's 21, 22, 23, 24 and again, 19.6% and projected to actually increase. And so you're looking at net margins for the full year 2025 consensus projected at 27%. So that's a pretty big increase. And so that likely means that they're leaning harder into this software as a service business model.
And their margins, the net margins are expanding. And they've been able to keep their gross margins high. They're expanding those net margins. And again, as an analyst, this is something you want to deep dive on. And if we do a deep dive episode, let's say on Roper, we're going to deep dive into those sorts of things. And certainly for our analysts in the fall when they start looking at this company in our GW Investment Institute portfolio, we're going to want them to say, hey, what's going on here?
What is actually happening and why, you know, is this, you know, such a big difference from year to year, from this past year. What it's been relatively constant. So that that's very good. And so that's excellent. And if you look at the free cash flow from this company $2.2 billion. So that's very good. So if you're looking at revenue of $7.2 billion this year and $2.2 billion of free cash flow, that has been that's good.
In general. And so, you know, looking at the business, looking at the basic metrics from the market cap of $60 billion revenue, $7.2 billion gross profit of about $5 billion, 68% margins, their net income, about $1.4 billion, again trailing 12 months, 3/31 for that for these numbers, about 20% for the net income margins, generating $2.2 billion of free cash flow.
All relatively good. And we'll get to the balance sheet when we get there to cover what's happening there. But certainly, you know, understanding what's happening from the market cap, from the revenue, gross profit, the net margins, all very important. And what's the free cash flow? And again, the margins match the business. And so high gross margins and increasing net margins really, you know, transforming itself into much more as a software as a service business.
So what's up next. So let's talk about management. So we go from business to management now. And the grade that we would give the business before we move on. You know with those metrics in mind you know, and with now you're getting a slowdown in the growth, but you're getting an uptick in the net margins. You're getting a certainly a better business model that they're going into, focusing much more on the software side, you would probably give the business, let's say, a seven or an eight, but we can go with seven right now.
Let's be conservative. So now let's move on to the management. So the management the CEO is Neil Hunn. Neil Hunn has been the CEO since 2018. So a little over seven years that he's been at the helm for this company. And has been really transformative in this company and really has been taking in, focusing much more on the software side of the business.
And so if you look at the things that he's done over time, really focusing the company, if you look at those gross margins being very consistent, if you look at the out years now where they're increasing the net margins, those are all good things and and responsibly managed overall. And so. You would likely give him a pretty good score.
And so again, he's been there. He's been there certainly some time now again, since 2018, a little over seven years as CEO, he has helped transform this company. And again, the focus on the software as a service has been working out for them. And it looks like it's set to work even better in the out years. Now, one of the things that we'll have to pay attention to and ask our analyst to pay attention to, is that are they going to be able to execute now, the projected versus actual sometimes differ dramatically.
So it is something that we have to talk about. It is something that we have to focus on. It is something that we have to be concerned about and really monitor. Maybe concern is too strong, but something that we need to monitor and make sure, okay, are they going to with this transformation, are they going to get those margins?
Is that going to happen? Are they going to be able to do that? That's super important. That's something that our analysts really need to pay attention to. Really need to watch. So again, very important. But right now you're thinking management is doing an excellent job. And I would probably give them something in the neighborhood of a seven and eight.
We can give an eight, for that. So again our analysts are going to have to pay close attention to what's happening on on this margin story. In this transformation story, the focus on software as a service, really a transformation in the business model or or at least a a push in that direction. Maybe transformation is too strong of a word to use here, but certainly an emphasis, you know, on that.
And this current, group led by Niel Hunn is really the group that's doing that. And I think that is warranted for us to pay close attention to as business people, as analysts, as investors to make sure, okay, well, what is going on here? And are they really executing around this strategy? And are they going to get those net margins that are coming? Now to give them credit,
Those gross margins have been consistent over the last five years, and that's fantastic. And so that's something that you give them a very high score for. The free cash flow has been very good. A very high score for when we get to the balance sheet, we'll talk about that. And obviously we'll say something interrelated to management about how they've been managing the the balance between debt and equity in the company and what we'll get there.
But overall, I would say for the strategy, for the emphasis on the software as a service business, for the increasing in the net margins projected won't give them credit for that yet. We'll give them credit for being consistent, both on the gross and the net, with an eye to increase that net margin over time. So I think that's very important for us to watch and monitor and look at.
Next up. So let's give management before we move on about a seven. And you know, with again an eye towards what are we going to watch? We're going to watch the net margins, in this full year. And we're going to keep a close eye when the next quarterly comes out, the next 10-Q comes out. What are the net margins for the company?
Are they actually improving those? Do we think that trajectory that the consensus is, is aiming for that they're going to get there because it is a pretty big difference. You're going from 20 to 27. That's a pretty big jump. And that's a fantastic obviously. And you're going to pay more for that company. Which brings us to the price versus valuation.
This company is not cheap. So when you look at the forward PE, remember we're always looking at the forward because we care about what's happening in the future. So for this company 28 times. This is not a cheap company. This is not a company that you're going to say, oh, this is a deal. Excuse me, this is a deal.
Now, it's not super expensive. You're not paying 60 times. You're not paying 50 times or 45 times. You're paying 28 times. But you know, when you look at you look at the the revenue growth numbers that we talked about and you're saying we're paying 28 times. So if you go back to the revenue growth numbers for one second and you say, well, revenue growth we talked about peaked in 2023 at 15%, that's for the full year 2023 through December.
And it's been declining since then. 24 13.9% the trailing 12 months is 13.3%, with the full year projected 11.7%, and next year, 2026 you're talking under 8 7.7%, but you go back and you start talking about, well, what are we paying for that? What are we paying for that growth? Well, we're paying 28 times now. The counter-argument would be that if you actually get this increase in the net margins, that that will make up for it, that there's sustained high gross margins and their increasing net margins justifies this 28 times forward multiple.
Well, I think that is something again, why it's going to be very important for us as analysts as business people, as investors to pay close attention to what's happening with those net margins, because if they don't materialize, excuse me, maybe the 28 times is just a little too much. Excuse me. Maybe it's just a little too much for us to pay.
And again, our analysts are in our class in this fall are going to have to really take a look at that and monitor, well, what's going on with these net margins. Because if we're paying 28 times for this company, when the revenue again, if the revenue is growing, that would be a different story too. But the revenue is actually declining.
And it peaked a couple of years ago. So now okay, well, we got to think about this. We have to put some emphasis on really watching how they're managing the business. And the other part that I would be paying close attention to is the revenue growth. Now, are they going to achieve that through acquisition? So this getting back into the management side, what's the capital allocation plan for management?
And so obviously all these things are interrelated. And when you're looking at each component you have to think about how it is it's impacted by the others. So the price and valuation is obviously going to be set by the numbers that are driven by the type of business that they're in and the people that are managing that business, the management team.
So 28 times I would say not a fabulous valuation. And some, some of the things that we would we are going to be watching and we're going to be asking our analysts to pay attention to is what's happening with the net margins moving forward? And can they turn around this growth rate, on the revenue side, because those things, you know, let's say one or the other or both, ideally, play out in our favor in 28 times.
Certainly not a bad multiple, if you're having gross margins of 70% and net margins getting closer to 30% with some growth in the business. But declining growth, not a good thing. Something that we need to watch, something that maybe we're paying a little too much for right now. Right now it's it's in the portfolio. We're not buying more, so to speak, in the short term here, but it's something that we have to underwrite right now and think about.
So very important to watch the net margins impacts what we would want to pay you on the valuation 28 times right now, and watch what's happening with the revenue growth, which again, it's related to what's management doing on the capital allocation side? Are they growing the business? Is there organic growth or are they doing some M&A. Can they get that revenue number up?
And if they do it through M&A, can they maintain those gross margins and really hit those new net higher net income margins? So very important very important for us to think about and very important for us to pay close attention to. So next up, so before we move on, let's give the score though. The score here I would say is probably a six.
You know, this is not a terrible valuation, but I wouldn't call it a good valuation. And so let's say it's about a six or a six and a half. Right here. And you know, I would think that that's probably as good as we can give it, for the valuation. All right. Now, next up, let's move on to the balance sheet.
Now, this also obviously says something about management. How has management been managing the balance sheet? Well, if you look at the cash and cash equivalents right now you're at $372 million and you got $7.4 billion of debt. So over a net debt of $7.4 billion. But if you look down at the free cash flow of $2.2 billion in free cash flow.
So that doesn't help us sleep at night like a baby, then when we talk about Nvidia or Microsoft or Apple and the balance sheet side or Berkshire Hathaway, but it's not horrible. But $7 billion in net debt is something that's not that comfortable either. On a $60 billion, market cap company generating 2 billion in free cash flow.
So. Well, let let's really think about this. So and that again, let's look at this over time. That's the snapshot for 3/31 2025. Net debt of $7 billion. How has that evolved over time? Well the cash has stayed relatively constant. You have one uptick here in 2021. It went to $351. This is again year in numbers 12/31 2021 $351 million. $792.
So a little bit of a bump up, but then back down to $214 million, then $188 million in 2024 and again trailing 12 months, $372 through 3/31. And so the cash you know, in a minor jump up there. But it's been between, let's say 200 and 400 million on average between that time period.
So not a huge change. But the debt has gone from $8.1 to $6.8 to $6.5 to $7.8 to $7.4. That's 21, 22, 23, 24 and then the trailing 12 months number. And so you've seen a modest decline actually in the total debt and the cash, you know, staying relatively in a range there. So not a big difference there.
So you know, if you're talking about has management managed the balance sheet properly here. It looks like they've kept it relatively stable. No big jumps either way. And you would say you would give them a modest bump up in their score here to say that okay, they're actually a decline in the total debt. And the net debt situation, has improved a little bit.
Not dramatically. It's improved some. Okay. So what else, do we look to when we talk about the balance sheet. We also look to and say, well, what is the interest coverage ratio? Because you know, we want to know okay. Can they pay the interest on the debt? Well that ratio Ebit over total interest expense earnings before interest and taxes divided by total interest expense.
Right now that sits about 7.7 times. We like it closer to 10 and beyond. But 7.7, not bad. So for the balance sheet again no huge concerns on the balance sheet. But you're certainly not going to give the balance sheet a really dramatic score. You're going to give the balance sheet a score that that looks something more like a five.
And a half or a six. So overall, I think, let's say be generous, we'll give it a six. But it's not something that, again, that's going to help us sleep at night. It's not something that we're going to say, oh, this is fantastic. And we're going to sleep like babies at, like Microsoft, or Apple as an example.
So if you pull all those scores together, you're a little bit more generous here or there depends. And you weight them equally. You know, you bring in the business, you bring in the management, you bring in the price valuation, you bring in the balance sheet. Overall, Roper, you're probably looking at something like a six and a half, on on the total.
And again, maybe you're slightly more generous or conservative on some of the components, but so to wrap it up here, when we talk about the business, Roper Technologies leaning into the technology part of that business, really leaning into the software, giving them credit for that. On the management side, you're certainly looking for Neil Hunn and company. They he's been there for over seven years.
Pushing and emphasizing the software as a service. We'll continue to watch that. One of the things back connected to the business that we want to pay close attention to, as we mentioned, is what's happening both on the revenue side and very specifically, are they going to be able to grow those net margins? And so the capital allocation story for management, what's going to be the acquisition story?
What's going to be the organic growth story. Can they maintain those high gross margins around 70%. And can they increase those net margins from 20 to 27% as projected. So our analysts are paying close attention to that. On the valuation side, paying 28 times doesn't thrill us, but it's okay. Concerns around the revenue decline in revenue growth, not decline in revenue, but decline in revenue growth and the next part would be the balance sheet, which again, not super thrilled with, you know, we gave it a, you can give it up between a five and a six or a five and a half if you like.
But we would like to see some improvement there. Analysts are going to be watching us. So as businesspeople, as investors, as analysts, we're going to be watching this company closely. And overall, again, Roper Technologies is in our portfolio. We'll give it a six let's say as an overall something to watch. The emphasis will be on what's management doing over capital allocation, what's happening on the revenue growth story and what is happening very specifically on how they're managing those net income margins?
That wraps it up for Roper Technologies, and that wraps it up for this episode of “Market News with Rodney Lake.” We'll see you back on the next episode. Thank you.