Company Makes Aggressive Moves into the Healthcare Services Space

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Within the past 12 months, industrial equipment manufacturer Roper Industries (NYSE: ROP) has made two important acquisitions that have the potential to reorder the company's focus and boost its bottom-line earnings. 

In mid-2012, Roper inked a $1.4 million cash purchase deal with privately held Sunquest Information Systems, an important player in the laboratory software industry. More recently, the company agreed to purchase privately held Managed Health Care Associates for about $1 billion. MHA also provides digital services to healthcare providers across the United States. 

Taken together, these two acquisitions should pique investors' interest. While there is no guarantee that either pickup will be the game-changer that market-watchers anticipate, investors who fail to look more closely at Roper may miss a clear opportunity to buy into a hot firm at a discount. 

Roper Industries is an equipment manufacturer that makes a variety of industrial equipment for utilities, logistics providers and healthcare companies. In addition to its burgeoning medical equipment and software segment, Roper also produces a variety of hydraulic pumps, energy storage devices and RFID tags. It employs slightly less than 10,000 people and operates on a global basis.

Comparisons with the Competition

As Roper expands into the laboratory services and medical software spaces, it will find itself locked in an increasingly intense struggle for market share with Agilent Technologies (NYSE: A). Although it is a bit larger and focuses more narrowly on the healthcare services industry, Agilent provides many of the same software and diagnostic solutions as Roper. Its signature products include liquid and gas chromatography as well as various techniques that involve gene analysis and manipulation.

In the industrial equipment space, Roper must contend with much larger Halliburton (NYSE: HAL), a diversified provider of field equipment and logistical services to oil companies, military clients and other concerns. Although much of Halliburton's energies are focused on providing essential field services like drilling support, transportation, and waste management the company also offers project management support and other value-added services.

Financially, these companies exhibit some variation. With a profit margin of about 16.2 percent to Agilent's 15.9 percent and Halliburton's 9.3 percent, Roper is the most profitable by a narrow margin. However, the company has $2 billion in debt to just $370 million in cash. This cash-to-debt ratio is far worse than Halliburton's two-to-one spread and Agilent's one-to-one balance. Roper compensates for this deficit with a robust free cash flow metric of about $580 million to Agilent's $737 million. Halliburton actually has a negative cash flow, burning through nearly $100 million of its reserves in 2012.

Managed Health Care Associates Acquisition

Roper's most recent acquisition confirmed market-watchers' suspicions that the company wishes to make a major push into the healthcare services space. Under the terms of its agreement with Managed Health Care Associates, Roper will purchase the company for $1 billion in cash. Since MHA provides healthcare software solutions to pharmacies and long-term care facilities, this deal looks to provide Roper with a foothold in an often-overlooked segment of the medical ecosystem.

According to the statement that it released in concert with the deal, Roper expects this pickup to add at least $95 million to its annual EBITDA figure. If everything goes according to plan, the deal looks poised to close by the end of May of 2013.

Sunquest Information Systems Acquisition

Roper's MHA acquisition pairs nicely with its earlier purchase of Sunquest Information Systems. Like MHA, Sunquest develops products and solutions that streamline and simplify various aspects of practice and patient management. Whereas MHA focuses on "second-tier" settings like pharmacies and long-term care facilities, Sunquest provides its services to hospitals and clinics. Roper's $1.4 billion acquisition of Sunquest has given it a valuable foothold in this lucrative and fast-growing segment. 

How the Company Looks Now/Possible Plays

It is clear that these acquisitions will significantly change Roper's focus. For an example of how other companies expect to perform after strategic acquisitions click here. Between Sunquest's focus on "first-tier" settings like hospitals and MHA's focus on auxiliary settings, Roper suddenly has a robust healthcare software division that reaches many of the nation's healthcare providers and patients. If it can continue to develop the services that these two firms offer, these pickups could prove to be tremendously beneficial to the company's long-term outlook.

Roper's healthcare services segment already appears to be gaining momentum. In 2012, its orders and revenues both increased by around 15 percent. What's more, it seems to be working through a significant order backlog that could bolster its revenues for several quarters to come. It is important to note that Roper increased its full-year earnings estimates after inking the Sunquest deal.

In sum, Roper's recent moves should interest investors who wish to gain exposure to the fast-growing medical and laboratory device sector without investing in risky start-ups or non-diversified players. Given the relative stability of Roper's other businesses and the company's robust financial performance, the company looks like a good long-term buy even at these somewhat inflated levels. The best way to play this situation may be a simple long position with tight stops.

Domestic oil & gas service companies have taken a hit in the recent past due to a slowdown in the natural gas drilling boom of the last couple of years. As this market looks to rebound, investors would be wise to consider Halliburton, one of the top companies in the business and one of those most in tune with the domestic market. To access The Motley Fool's new premium research report on this industry stalwart, simply click here now and learn everything you need to know about how Halliburton is positioning itself both at home and abroad.

Mike Thiessen has no position in any stocks mentioned. The Motley Fool recommends Halliburton. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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