Roper's Rating Affirmed by Moody's - Analyst Blog

Moody’s Investors Service, a subsidiary of Moody’s Corp. (MCO) confirmed its senior unsecured rating of ‘Baa3’, a low-end investment grade rating and its senior subordinate debt as Ba1, a speculative grade rating for Roper Industries Inc. (ROP).

Roper provides energy systems, industrial technology and radio frequency products and solutions to the water, energy, radio frequency and research industries. The rating was reaffirmed on the basis of Roper’s business diversification and limited customer concentration.

Moreover, Moody’s raised Roper’s outlook to ‘positive’ from ‘stable’ and expects to raise the rating in the near term, if Roper maintains its current financial profile and key credit metrics.

According to Moody’s, Roper benefited from a strong margin expansion. Despite an overall decline in its revenues and orders during 2009, the company generated impressive cash flow.

Roper ended the second quarter 2010 (most recent quarter) with $290.7 million in cash and equivalents and $1.13 billion in long-term debt (including the current portion). This compares with $191.3 million in cash and equivalents and $1.12 billion in long-term debt (including the current portion) in the first quarter of 2010.

Operating cash flow was $110 million in the quarter versus $95.1 million in the previous quarter. Year to date, the company reported an operating cash flow of a record $205 million.

During the second quarter, EBITDA increased to $145 million, or 25.7% of sales. Free cash flow of $102.6 million was 18% of sales and 144% of net earnings.

The company also announced a dividend of $9.5 cents per share or a dividend yield of 0.6% and a dividend payout ratio of 13.2%. Roper’s five-year growth rate for dividend of 11.5% is higher than its closest competitor Badger Meter Inc. (BMI) (10.8%) and Itron Inc. (ITRI), who does not pay any dividend.

Deals

Moody’s also pointed out that rating on Roper Industries could be upgraded, if it successfully integrates its recent acquisitions. As a part of its growth strategy, Roper has made numerous acquisitions and is likely to continue doing so in the future. The company has completed more than $2.20 billion worth of deals, according to Reuters.

During the second quarter earnings, reported in July 2010, Roper announced to acquire iTradeNetwork Inc. from private equity firm, Accel-KKR for $525 million in an all-cash transaction.

iTradeNetwork provides subscription-based hosted software solutions to the food industry that facilitate transactions between retail grocers, restaurant chain operators, foodservice distributors and their respective customers.

Roper expects iTradeNetwork to generate more than $55 million of EBITDA in 2011. The acquisition will provide a boost to Roper’s software-as-a-service (SaaS) business and help expand the software solution business.

With the help of numerous acquisitions that are low on investment and high in margins, Roper has been growing into the SaaS business. In 2009, the company acquired United Toll Services that provides software and in-lane hardware systems for toll and traffic markets.

Second Quarter Highlights

Roper’s net profit per share for the second quarter stood at 74 cents per share, up 15.6% or 10 cents from the same quarter last year. EPS was in line with the Zacks Consensus Estimate. Second quarter revenues of $567.1 million were up 12.3% year over year, of which 7.2% of the growth came from acquisitions/divestitures and 5.1% from organic growth. Revenues beat the Zacks Consensus Estimate of $559.0 million

As a result of its strong first half performance and improving order trends, Roper Industries lifted its full-year 2010 earnings per share guidance in the range of $3.05 to $3.15 from the previously expected range of $2.95 to $3.10. The company also raised its guidance for operating cash flow, and now expects to generate between $425 million to $455 million, up from $400 million to $425 million previously projected.

With a record backlog, the company expects strong organic sales growth in the second half of 2010.

We have an Outperform rating on Roper Industries on a long-term basis with a Zacks Rank #2, which implies a short-term Buy rating on the stock.