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Introduction

         Roper Industries (ROP) is a $6.05 billion company in the scientific and technical industry. Market capitalization competitors in this industry include Trimble Navigation Limited, Cytyc Corporation, and Pall Corporation. The scientific and technical industry is up 58% over the past year compared to the S&P 500 which up 11% during the same period. Over the past month the industry has been up 2.50%, while the S&P 500 has been down 0.2%. Because October is an earnings month, there is optimism in this industry. Roper's growth and valuation illustrate the potential for a strong earnings report next quarter.

Business

         This section describes what Roper produces. According to Reuters, Roper "designs, manufactures and distributes energy systems and controls, scientific and industrial imaging products and software, industrial technology products, instrumentation products and services, and radio frequency products and services." Roper is further divided into four business segments: industrial technology, energy systems and control, scientific and industrial imaging, and RF technology. Industrial technology takes over 32% of total sales. The segment "manufactures and distributes a variety of pumps." The pumps are used for extraction purposes and are sold to the oil, gas, and agricultural industries, among others.

         The second segment, energy systems and controls accounts for 20% of total Roper sales. This segment "manufactures control systems and panels, and provides related engineering and commissioning services for turbomachinery applications." These types of products are used in the energy industry. This segment also produces equipment products to test matter viscosity, freezing temperatures, and element content. These goods are sold to the chemical and gas industries.

         The next segment, scientific and industrial imaging, produces cameras and memory devices. These devices are sold to a diversified consumer list including academic institutions, the government, and semiconductor corporations. The devices are used for activities such as ultrasound and utility meter readings, among other utilizations. The last segment RF Technology produces equipment used for toll and traffic systems. The value of this segment is high, because 28% of total Roper sales come from this area.

         Moreover, Roper produces these products for the United States, Canada, and Europe. Multinational exposure is an advantage with current market conditions. A low dollar will mean higher exporting rates which will equate with more demand and a higher revenue figure. Investors need to take advantage of the opportunistic economic situation.

Growth

         Roper Industries is growing at a solid and sustained rate. Revenue was $1.7 billion the past fiscal year. This number was a 21.41% increase from revenue a year ago. This is an outstanding figure, despite the industry average at 42.39%. Competitors Pall (13.20%) and Cytyc (20.46%) both reported lower sales growth the past year. More importantly, strong revenue figures helped produce strong earnings for Roper. Earnings grew 21.80%, according to Reuters, over the past fiscal year. The industry grew 8.57%. Trimble grew 5.67% and Cytyc lost 53.62%. Therefore, there is strong evidence that Roper is growing.

         Strong earnings and strong revenue means Roper is using its costs effectively. Gross margins over the past fiscal year were 50.20%. Operating margins during the same time were 20.27%. Both these figures beat the industry averages of 48.02% and 10.33%. Roper beat Trimble's margins (50.11% and 14.54% respectively) and Pall's margins (47.04% and 11.90% respectively). More importantly, Roper had a strong net profit margin. The company's 11.58% was higher than the industry's 6.38% margin. In addition, Roper's margin was higher than Trimble's (10.06%), Cytyc's (9.01%), and Pall's (9.55%) respective margins. A higher net profit means Roper is earning more cents per every revenue dollar earned. The extra cash could be used for future stock buybacks, increased dividends, and capital expenditures. Over the past five years Roper has grown its CAPX spending appropriately. The company's fixed asset ratio of 4.0 is outstanding. The ratio means Roper makes the most of its fixed assets to improve productivity. Further economies of scale will continue to result in higher revenue and earnings in a favorable cycle.

         Connecting earnings to the balance sheet, Roper sees a trailing ROE of 14.76%. More earnings per shareholder dollar equates to strong use of equity capital. Trimble only has an ROE of 12.92%, Cytyc has an ROE of 8.47%, and the industry has an ROE of 11.28%. ROA for Roper is 7.55% which is above the industry's 5.26%. ROI of 9.37% is also above the industry's 7.19%. Growth continues to be evident for Roper.

Valuation

         Roper is undervalued relative to the industry. Roper's forward P/E ratio of 25.32 is significantly lower than the industry's 35.85 multiple. Roper's price to sales multiple of 2.99 is also lower than the industry's 3.64 multiple. This number is very favorable compared to Roper's market-cap industry competitors. Roper's multiples are below Trimble (34.86 and 4.41 respectively) and Cytyc (37.81 and 8.85 respectively). Lower multiples mean the market has not figured out how cheap Roper currently is compared to other competitors. This deviation from the norm means there is a strong potential for increased share price appreciation, especially with high growth. Roper's relatively low (compared to Trimble's 2.27 multiple) PEG ratio of 1.70 demonstrates this example.

Efficiency

         Roper is very efficient. The company's inventory turnover of 5.76 is stronger than the industry's 4.86. Receivable turnover at 6.26 is also higher than the industry's 6.11 figure. This number means that Roper collects cash from consumers every 59 days on average. Moreover asset turnover at 0.65 is not great, but solid compared to the industry. Fixed asset turnover is much higher and illustrates the company's strong use of property, plants, and equipment. However, Roper has more than enough assets to cover its liabilities. The most recent current ratio of 1.20 illustrates the company's solvency. The company's debt to equity ratio of 0.65 is also supportive of the option of liquidity.

         Moreover, Roper provides a generous dividend yield. The company's 0.39% yield is higher than both Trimble and Cytyc, both offering no dividend. Institutional investors have recognized the benefits of Roper's dividend yield and other fundamentals. Currently, institutions own 94.22% of all Roper shares. Since the institutional investors have a larger gross amount of capital to lose compared to the retail investor, a high institutional percentage illustrates confidence in the stock's ability.

Technical Analysis

         Roper has performed very well share-price wise. In 2007 the company's share price is up 36%, despite bearish economic news the second half of the year. The company was up 23% in 2006 and has not experienced a negative calendar year since 2002. Interestingly, since 2003 up to October 2007, Roper's share price is up 270% for an annual growth rate of 57%.

         More specific to the current month, Roper illustrates strong technical signals. The 50 day SMA and 50 day EMA are both linear over the past three months. Parabolic SAR did recently fall below the market price, but a strong earnings performance will boast the SAR upwards. The company is a little overvalued compared to the RSI index at 63.1, but it is better to be an advocate of fundamental valuations before technical valuations. Therefore, while now isn't the most ideal time to purchase shares of Roper according to technical analysis, purchasing shares will still produce strong long terms gains.

Conclusion

         Roper Industries is a great acquisition for any portfolio. The company's business model and fundamental analysis are both strong. It is very rare to find a company that has both strong valuation and growth, so it is wise to take advantage of these situations as they arise.

-Dennis Biray
October 26th, 2007