Roper Technologies (ROP) , the M&A powerhouse with a $17 billion market capitalization led by the revered (and feared) Brian Jellison, may have lost the free pass it had been awarded over the years. The stock, up almost 5-fold over the past decade or so, would usually get a "don't worry about it" from institutional types -- knowing full well a "cash accretive" acquisition with extraordinary margins and market position would follow in short order.
Roper has been beneficiary of a flight to quality over the years, even as fundamentals in certain segments appear somewhat squishy. The company always seemed to offset that with that next, special deal. But what now?
Earnings and the remarkably generous adjustments to these earnings now have a downward skew. Organic growth is being challenged and the law of large numbers is making the deal dynamic for this company -- and the shares -- materially more difficult. It used to matter a lot more when Roper made a $1 billion acquisition. But with a current enterprise value of more than $19 billion that next $1 billion acquisition will have a more difficult time creating much excitement.
There was a known "wow" factor whenever Roper made an acquisition. These properties, generally sourced through the private channels, would carry extraordinary margins and fast(er) organic growth. The deals would be the envy of other "nation builders" looking for pillars of organic growth and structural margins that increase the overall company average. They are hard to find and expensive -- although Roper has a great track record of delivering such high-quality M&A -- so the company will just have to get bigger to move the needle.
Certainly, the quality properties that Roper has purchased over the years have expanded the company into higher technology and more asset-light and service-orientated markets. These deals have not come without cost, however. The company sports almost $9 billion in goodwill and intangibles on its balance sheet. Roper's gross margins, rising to more than 60%, are optimized. Jellison and the team are relentless on costs, so structural margin improvement is no longer a lever for incremental earnings growth.
Roper's business is now all about the top line. Organic growth needs to accelerate for the stock to work here. And the next deal has a higher probability to be a snoozer. It's going to be an interesting search for an encore, especially in the face of lowered guidance and slowing revenue over the last couple of quarters.