We expect Roper Technologies, Inc. ROP to beat expectations when it reports fourth-quarter 2015 results on Feb 1, 2016. Last quarter, it posted a 2.55% positive earnings surprise. It is noteworthy that Roper Technologies has outperformed the Zacks Consensus Estimate in the preceding four quarters with an average positive earnings surprise of 2.88%.
Why a Likely Positive Surprise?
Our proven model shows that Roper Technologies is likely to beat earnings because it has the right combination of two key ingredients. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. The combination of Roper Technologies’ Zacks Rank #3 and Earnings ESP of +0.54% makes us confident in looking for an earnings beat this quarter.
Factors at Play
We believe Roper’s unique asset-light business model helps it to remain less dependent on large-scale production equipment. This enables the company to remain profitable even when sales decline during recession. Moreover, higher infrastructure related spending bodes well for the company. We believe that large project wins, strong order trends and improving backlog will drive the top line in the long run.
In addition, the company’s optimum mix of highly engineered, niche-oriented products helps it to gain market share. Though Roper operates in a cyclical business environment, its diversified revenue stream has helped it to counter the headwinds. We believe that Roper’s innovative product pipeline will be a major growth catalyst over the long term.
Also accretive acquisitions have played a crucial role. Roper has a history of acquiring smaller, asset-light businesses with high profit margins, particularly companies providing medical solutions. Successful integration of the acquisitions has contributed meaningfully to the top line and margins. In 2014, acquisitions contributed 3% each to revenue and order growth.
Over the three years (2012-2014), it has acquired 11 companies. In 2015, the company announced the acquisition of Aderant Holdings, Inc. for $675 million and expects the buyout to generate $125 million in revenues in 2016. Also, it announced acquisitions of CliniSys Group Ltd., a leading European supplier of LIMS and Atlas Medical, a domestic clinical process and connectivity solutions provider. Apart from that, the company also acquired RFIDeas, Inc. and Atlantic Health Partners, LLC for $277 million in Sep 2015.
Roper also acquired Strata Decision Technology, LLC and two medical software companies, namely, Data Innovations, LLC and SoftWriters, Inc. Roper expects to generate about $100 million in revenues per year from these three acquisitions.
We believe that the company will continue pursuing small acquisitions that strategically fit its overall business mix and are easy to integrate over the long term. However, the company’s high debt levels may limit its future expansion and worsen its risk profile. As of Sep 30, 2015, the company had a net debt position of $2.1 billion and debt-capital ratio of more than 35.2%. Apart from high-debt levels, macroeconomic concerns, integration issues due to acquisitions and intensifying competition remain added concerns.
Stocks to Consider
Here are a few companies that you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:
SolarWinds, Inc. SWI with an Earnings ESP of +2.27% and a Zacks Rank #1.
Energizer Holdings, Inc. ENR with an Earnings ESP of +3.03% and a Zacks Rank #3.
Fidelity National Information Services, Inc. FIS with an Earnings ESP of +2.17% and a Zacks Rank #3.
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