1/ Mark Leonard introduced me to vertical market software (VMS) in his yearly letters to Constellation Software’s shareholders. In his 2017 letter, he references an apex predator, Roper, $ROP, whose lineage @walshgb unpacks below
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2/ Roper reports across four segments, two that provide VMS and contribute ~65% of earnings power and the other two offering industrial and medical devices. Over the next four tweets, I pair a thumbnail of each segment’s financial profile, with its description from ROP’s 2019 10K
3/ The Application Software segments provide VMS to a variety of enterprises and industries ranging from law, education, labs, govt. contractors, etc. Tyler Technologies, $TYL, who sells VMS to municipal govt. and Constellation Software are two somewhat similar businesses
4/ Roper’s Network Software segment houses marketplace style businesses as well as VMS serving diverse end-markets; construction, freight, digital design, financial services, supply chain management, public transit and more. Cubic Corp, $CUB, also provides VMS to public transit
5/ Measurement and Analytical Solutions sell niche products to industrial and medical businesses. Similar businesses include industrials such as $IEX, $MMM, $NATI and medical device manufacturers; $DHR and $TMO
6/ Roper’s Process Technology sells similar products as their Measurement and Analysis segment but into asset intensive and cyclical industries; energy, mining, power, refining, etc. The segment reminds me of Ametek, $AME, Fortive, $FTV and Teledyne, $TDY
7/ During the recent pandemic quarter, Roper's two VMS segments each grew revenue slightly while Measurement and Analytical Solutions comped (1%) sales y/y. Process Technologies sales’ were down 26%, due to oil and gas exposure and in-line with similar industrial businesses
8/ Roper’s longtime CEO and Chairman, Brian Jellison, described their thinking in selling Gatan, eventually to Ametek, in an earnings call from 07/26/2018. Current CEO Leslie Nunn minced no words this AM as he clarified the types of acquisitions in their sights, 100% software!
9/ Below are the handful of businesses that share similarities to certain of Roper's segments, described above. Statistically, The Company most closely resembles its VMS peers. ROP's valuation multiple of 25.1x EV / FCF is modestly more expensive than it's recent history
