Compound and Conquer
In this edition of the Smart Investor newsletter, we examine the stock of a company known as the “Berkshire of Industrials”. But first, let’s dive into the latest Portfolio news and updates.
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Market & Portfolio Update
The strong rally of the past two weeks, led by tech stocks, propelled the S&P 500 out of correction territory and lifted investor spirits. However, the factors that nearly pushed indexes into a bear market – including trade policy flip-flops and economic uncertainty – have not disappeared, with bouts of volatility poised to return, primarily driven by tariff and macro headlines.
While the ongoing earnings season is shaping up to be better than expected, the near-term outlook for U.S. companies remains clouded by trade disputes, macro uncertainties, and other shifting factors. This overhang continues to reduce visibility into earnings and valuations, leaving analysts at a loss as to how to factor near-total uncertainty into their outlooks.
In this environment, Smart Investor stays focused on what truly matters: fundamentals, business quality, and portfolio diversification across industries – prioritizing companies with the resilience to withstand tariff impacts and economic downturns while maintaining profitability and delivering shareholder value.
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Portfolio Updates
❖ Berkshire Hathaway (BRK.B) shares fell on Monday after the holding company’s annual stockholder meeting delivered unexpected news – unrelated to revenues and earnings, which came below estimates. In Q1, Berkshire suffered from insurance underwriting losses due to California wildfires, while net earnings were hit by $5 billion in investment losses, as Berkshire’s stock portfolio suffered from market volatility. However, these short-term blips are less relevant for reflecting the conglomerate’s underlying long-term value, operating strength, or investment potential.
The big news hit as Warren Buffett – aka “the Oracle of Omaha,” the world’s most famous, and probably most successful investor – announced his intention to step down as CEO at year-end. Buffett asked the company’s board to formally elevate Greg Abel, who already plays a key leadership role, to the position. The board has since approved the move, making Abel president and CEO effective January 1, 2026.
Berkshire has spent years preparing shareholders for this changing of the guard, with Abel long designated as Buffett’s successor. In his traditional letter to shareholders back in February, Buffett noted it wouldn’t be long before Abel would be the one writing those annual missives. Still, the timing of the announcement caught nearly everyone off guard – shocking shareholders, a global audience, even some board members, and Abel himself – creating uncertainty and weighing on the stock.
Back in 1965, Buffett acquired the then-struggling textile business – Berkshire Hathaway – and over decades transformed it into the cash-churning investment empire it is today. The firm’s investment portfolio stands at around $300 billion, while its roster of wholly owned businesses spans nearly every economic sector. Berkshire also held nearly $350 billion in cash at the end of Q1.
BRK.B regained its footing on Tuesday as investors digested the news and refocused on fundamentals. The succession has been in motion for years, with Buffett publicly naming Abel in 2021. A seasoned, Buffett-trained executive – vice chairman overseeing all non-insurance operations and known internally as a “problem solver” – Abel is poised to take the reins of a truly exceptional business.
Berkshire Hathaway boasts an unmatched asset base, positioning it for continued strong shareholder returns. Despite recent headwinds in dealmaking and insurance, its collection of businesses generates nearly $50 billion in annual operating earnings. From railroads and insurance to restaurant chains and furniture retailers – Berkshire’s diversification is second to none.
Buffett sought to calm rattled investors, confirming he will remain chairman and has no intention of selling any Berkshire stock. He remains the company’s largest shareholder with 15% of the shares. True to form, the Oracle of Omaha offered broader wisdom as well – expressing skepticism about tariffs and trade restrictions, but closing with his trademark optimism for investors: “The long-term trend is up.”
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❖ Microsoft (MSFT) released its fiscal Q3 2025 results, with analysts praising the tech giant’s “exceptional quarter.” Total revenue rose 13% year-over-year and adjusted EPS surged nearly 18% – both metrics far outpacing consensus estimates.
The earnings call emphasized strong momentum in Microsoft’s cloud and AI segments, with substantial revenue growth and continued advancements in AI capabilities. While there were challenges such as the decline in on-premises server revenue and increased AI infrastructure costs, the positive aspects – including record cloud revenue and robust performance in LinkedIn, Dynamics 365, and the gaming sector – far outweighed the negatives.
MSFT’s cash generation remains unmatched. The company ended the quarter with $37 billion in operating cash flow, supporting a free cash flow surge to $20.3 billion – equivalent to an FCF margin of 29%. This exceptional liquidity continues to fund buybacks, dividends, strategic M&A, and aggressive capex.
CFO Amy Hood noted insatiable corporate demand for AI services, adding that AI capacity constraints may emerge after June, primarily due to power and data center limitations, which Microsoft is actively investing to overcome. The company spent $21.4 billion on data center and AI infrastructure in the quarter – a 53% YoY increase – and reaffirmed plans to spend approximately $80 billion on AI infrastructure in fiscal 2025, with the pace of investment expected to remain high into fiscal 2026.
In FQ3, Microsoft Cloud revenue reached a record $42 billion, rising 22% year-over-year – driven by broad-based demand across industries. Within this space, Microsoft Azure was the standout, growing 33% and beating Wall Street’s 30% estimate. Nearly half of Azure’s growth was AI-driven – a major shift – as enterprise demand accelerates for tools like Azure OpenAI and AI-optimized infrastructure.
Outside of Microsoft Cloud, another standout was search and news advertising, which climbed 23% year-over-year – its strongest performance in five quarters – fueled by AI-powered ad generation and new Ads Studio tools. Microsoft’s Office segment also delivered solid results, with revenue at the high end of expectations, and positive outlooks tied to the adoption of Copilot and other AI-enhanced productivity tools. Copilot usage tripled year-over-year, and its adoption is becoming a significant recurring revenue driver.
Looking ahead, MSFT sees AI as the engine of its next growth cycle, with revenue momentum expected to remain concentrated in Azure and related services. For fiscal Q4, the company forecasts Intelligent Cloud revenue growth of 20-22%, and Azure growth of 34-35% in constant currency – well above the 31.5% Street consensus.
These blowout results and bullish guidance prompted a wave of analyst upgrades and price target hikes, with Wall Street applauding Microsoft’s execution amid macro concerns – including trade tensions and economic uncertainty – and its ability to dispel investor doubts around AI monetization.
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❖ EMCOR Group (EME) delivered record-setting Q1 2025 results, underscoring its strength in construction and facilities services across diverse end markets. Revenue rose 12.7% year-over-year to $3.87 billion, while non-GAAP diluted EPS climbed 29.7% to $5.41 – both significantly exceeding expectations. Operating income grew 22.6%, with operating margins expanding 90 basis points to 8.5% (non-GAAP), reflecting effective cost control and operational discipline.
Performance was led by the U.S. Electrical Construction segment, which surged 42.3% year-over-year, supported by the integration of Miller Electric – contributing $183 million in Q1 revenue. The U.S. Mechanical Construction segment also posted solid growth, up 10.2% versus the prior year. Meanwhile, the Industrial Services segment faced headwinds from a delayed turnaround season and higher credit loss allowances, and Building Services saw a revenue decline tied to a reduction in site-based services. Still, the positives far outweighed the negatives, reinforcing EME’s operational resilience.
Backlog momentum remained strong, with record remaining performance obligations (RPOs) of $11.75 billion – up 28.1% year-over-year – supported by strength in Network & Communications, Healthcare, Manufacturing, and Institutional markets. Notably, data center RPOs more than doubled, up 112% year-over-year, underscoring surging demand in digital infrastructure.
EMCOR exited the quarter with $577 million in cash and a total debt-to-capitalization ratio of just 8%, preserving balance sheet flexibility.
Despite macroeconomic uncertainties – including tariffs, interest rates, and supply chain challenges – EMCOR reaffirmed its 2025 revenue guidance of $16.1–$16.9 billion and narrowed its non-GAAP EPS range to $22.65–$24.00, reflecting improved visibility. At the midpoint, this outlook implies 10.4% revenue growth and a 14.5% increase in EPS versus 2024.
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❖ Parker Hannifin (PH) reported strong Q3 FY25 results, highlighted by record margins and continued progress on its long-cycle growth strategy. Adjusted EPS rose 7% year-over-year to $6.94, while adjusted segment operating margin expanded 160 basis points to a record 26.3%. Adjusted EBITDA margin also reached an all-time high of 27%, underscoring disciplined execution in a mixed demand environment. Both EPS and revenue comfortably beat analyst consensus estimates.
Sales declined 2% YoY to $4.96 billion, but organic sales edged up 1%, reflecting resilience in core operations. Growth was fueled by the Aerospace Systems segment, which saw organic sales surge 12% and adjusted operating margin expand 200 basis points to 28.7%, driven by robust aftermarket demand. The Diversified Industrial North America and International segments faced softer demand in transportation and energy, but still posted record margins of 25.2% and 25.1%, respectively, aided by simplification initiatives and pricing discipline.
Order rates accelerated to +9%, with strength in long-cycle programs and improving trends across most industrial verticals. Notably, Aerospace backlog hit a record $7.3 billion, reflecting Parker’s growing presence in commercial and defense OEM and aftermarket channels.
Cash generation remained a bright spot. Year-to-date, operating cash flow reached $2.3 billion, up 8%, while free cash flow totaled $2 billion, translating to a strong 15.8% FCF margin. Parker repurchased $650 million in shares during the quarter and increased its dividend by 10%, marking its 69th consecutive annual dividend increase.
Looking ahead, Parker reaffirmed its full-year adjusted EPS guidance of $26.60-$26.80 – implying approximately 12.2% growth over fiscal 2024 – supported by sustained margin expansion and disciplined execution. The company expects organic sales to grow 1% for the year, led by continued strength in the Aerospace segment. It also maintained its adjusted segment margin outlook at 25.9% and projected $3.1-$3.2 billion in free cash flow, with conversion exceeding 100%, highlighting robust cash generation amid macro softness in industrial markets. Management reiterated confidence in its simplified, high-margin portfolio and emphasized long-term demand drivers in aerospace, electrification, and process industries.
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❖ Howmet Aerospace (HWM) saw its stock surge following the release of its Q1 2025 results and guidance. The company kicked off the year with a record-setting performance, powered by strong execution in aerospace markets and continued margin expansion. HWM’s revenue rose 6% year over year to $1.94 billion, and adjusted EPS surged 51% to $0.86 – both well ahead of expectations.
Adjusted EBITDA climbed 28% to $560 million, with adjusted EBITDA margin expanding to a record 28.8%, driven by robust results in the Engine Products and Fastening Systems segments. The aerospace business remains the company’s growth engine, now accounting for 68% of total revenue. All segments except Forged Wheels posted strong year-over-year growth; that segment’s revenue declined due to soft commercial transportation demand, although margins held firm.
Free cash flow for the quarter totaled $134 million, up from $95 million a year ago. The company deployed $125 million toward share repurchases and paid a $0.10 per share dividend – double the year-ago level. In April, HWM repurchased an additional $100 million of stock, signaling confidence in long-term cash generation and capital return priorities. Fitch upgraded Howmet’s credit rating to “BBB+” during the quarter, citing its improving balance sheet and consistent performance.
Looking ahead, management raised full-year guidance, despite ongoing uncertainty in North American truck builds due to macro and trade headwinds. HWM now expects total revenue to reach $8.03 billion at the midpoint (up about 8% YoY), with adjusted EBITDA of $2.25 billion and EPS of $3.40 – up 18% and 26%, respectively, over FY24. Free cash flow is forecast to reach $1.15 billion, implying a robust 85% conversion. The outlook assumes tariff cost pass-through and continued momentum in aerospace and industrial gas turbines.
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❖ MetLife (MET) delivered solid Q1 2025 results, showcasing broad-based business strength and exceeding revenue expectations, though adjusted earnings per share came in just shy of analyst forecasts. Total revenue rose 15.2% year-over-year to $18.57 billion, while adjusted EPS increased 7% to $1.96, narrowly missing consensus estimates of around $2.00.
The EPS shortfall was driven primarily by weaker performance in Asia, where adjusted earnings declined 12%, reflecting underwriting pressure and adverse tax impacts in Japan. Latin America posted a 6% decline, largely due to unfavorable currency effects, while spread compression in pension risk transfer deals weighed on margins in the Retirement and Income Solutions (RIS) segment.
Despite these headwinds, core business fundamentals remained strong. Premiums, fees and other revenues rose 14% to $13.6 billion, and variable investment income surged 26% to $327 million, buoyed by strong returns from alternatives and real estate. Group Benefits led performance with a 29% increase in adjusted earnings, driven by favorable underwriting and pricing discipline. RIS delivered 1% earnings growth, with premiums and fees nearly tripling on robust pension risk transfer activity. Adjusted return on equity (ROE) rose to 14.4%, underscoring solid profitability.
Strategically, MetLife took meaningful steps to reduce risk in its legacy variable annuity block. In Q1, the company executed a $10 billion reinsurance transaction with Talcott, aimed at minimizing tail risk, improving capital efficiency, and reducing earnings volatility. The deal is expected to generate $250 million in economic value and produce incremental fee income via asset management mandates tied to the reinsured assets.
Looking ahead, MetLife reiterated its commitment to disciplined capital allocation, risk mitigation, and cost efficiency amid continued macroeconomic uncertainty – particularly around interest rates, foreign exchange, and regional performance variability. The company maintained its 2025 direct expense ratio target of 12.0%, which it achieved in Q1.
MetLife also reinforced its shareholder return strategy. In Q1, it returned $1.8 billion to shareholders, comprising $1.4 billion in buybacks and $400 million in dividends. In April, the company announced a new $3 billion share repurchase program, reflecting confidence in its long-term free cash flow generation and balance sheet strength.
Following the results, Bank of America raised its price target on MetLife shares to $94 from $91, citing updated forecasts based on a lower projected share count and higher earnings expectations in Group Benefits and U.S. operations.
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❖ Uber Technologies (UBER) has seen its stock rise in recent days as analysts anticipate strong Q1 earnings results and the company continues to ramp up its global expansion efforts.
The ride-hailing giant has announced its acquisition of the Turkish online food delivery service Trendyol GO for $700 million. The transaction is subject to regulatory approval and other customary closing conditions, with completion expected in the second half of 2025.
In addition, Uber has significantly expanded its partnership with Chinese autonomous vehicle technology firm WeRide. Over the next five years, the two companies plan to roll out robotaxi services in 15 more cities, including locations in Europe and other regions beyond China and the U.S. This move builds on their current collaboration, which launched in Abu Dhabi in December 2024, with a rollout in Dubai planned next.
The deepened collaboration with WeRide enhances Uber’s global autonomous strategy, particularly given WeRide’s operations in about 10 cities across 7 countries, including China, the UAE, and Switzerland. WeRide also holds autonomous driving test licenses in China, the U.S., the UAE, and Singapore, providing Uber with regulatory leverage to enter and scale in key international markets.
At the same time, Uber has entered into a separate agreement with Chinese autonomous driving company Pony.ai, targeting deployment in the Middle East. Uber plans to integrate Pony.ai’s robotaxis into its platform, with a pilot launch expected later this year in a major regional market. Initially, these vehicles will operate with safety drivers before transitioning to full autonomy.
Separately, Uber is also partnering with Chinese self-driving startup Momenta to introduce robotaxi services outside the U.S. and China. The first rollout is scheduled for early 2026 in Europe, starting with safety operators on board.
Over the past two years, Uber has aggressively expanded its footprint in the autonomous vehicle space, forming partnerships with more than 15 AV companies. In the U.S., its most advanced operational partnership is with Alphabet’s Waymo. The “Waymo on Uber” service is currently active in Austin, with a launch in Atlanta planned soon.
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❖ Alphabet’s (GOOGL) Waymo is significantly expanding its robotaxi business, currently completing over 250,000 paid rides each week in cities like Phoenix, San Francisco, Los Angeles, and Austin. The company plans to launch its services in Atlanta, Miami, and Washington, D.C., with Washington, D.C., specifically targeted for 2026, to meet growing demand.
To support this growth, Waymo is partnering with Magna International to produce autonomous Jaguar I-PACE and Zeekr vehicles at a new facility in Mesa, Arizona, starting in 2025. When operating at full capacity, the factory will be able to produce tens of thousands of fully autonomous vehicles each year.
Waymo is also expanding its operations through partnerships. This includes working with Moove for fleet management, starting in Phoenix in 2025 and expanding to Miami in 2026, and collaborating with Toyota to develop an autonomous vehicle platform and personally owned vehicles.
These initiatives are poised to significantly impact the ride-hailing industry. However, rather than competing directly, Waymo is more likely to collaborate with existing ride-hailing leaders like Uber and Lyft to leverage their extensive user bases. Such collaborations could also help these companies counter potential competition from Tesla’s anticipated robotaxi services.
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❖ Arista Networks (ANET) reported stellar Q1 2025 results, with both revenue and EPS surpassing analyst consensus on continued strength in AI-related spending. Total revenue came in at $2.01 billion versus the consensus of $1.97 billion, while adjusted EPS was $0.64, compared to the expectations of $0.59.
Moreover, ANET provided an upbeat guidance for Q2 on both metrics – also above analyst projections – saying it expects “AI, cloud, and enterprise customers continue to drive network transformation.” The networking champion said it projects second-quarter revenue to come in at about $2.1 billion, with adjusted gross margins at around 63%, while adjusted operating margins will be approximately 46%. Arista’s board of directors authorized an additional share repurchase program of up to $1.5 billion.
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Portfolio Stocks Under Review
❖ We are removing Howmet Aerospace (HWM) from “Under Review” bracket following its blockbuster earnings report and upbeat guidance – as detailed in the “Portfolio News and Updates” section above – and after a slate of Wall Street price-target increases.
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❖ We are keeping RTX (RTX) under review due to the conflicting signals from recent developments.
The aerospace and defense company delivered strong Q1 2025 results and issued an upbeat full-year outlook. However, those forecasts did not account for the potential impact of newly enacted U.S. and international tariffs. While approximately 70% of RTX’s production and over 65% of its supply chain spend are U.S.-based, the company still imports raw materials, parts, and modules globally and serves a large international customer base. RTX warned that, if current trade conditions persist, full-year operating profit could be reduced by as much as $850 million.
On the other hand, Morgan Stanley recently upgraded RTX from “Hold” to “Buy.” The firm noted that even in a worst-case scenario – where the company absorbs the full $850 million in tariff-related costs – the impact would be relatively moderate. Analysts pointed to RTX’s pricing power, strong positioning in defense, and its duopolistic role in commercial aerospace OEMs and oligopolistic position in the A&D supply chain as factors that would help mitigate long-term damage.
Meanwhile, rising global defense spending continues to offer strong support. President Trump’s fiscal 2026 budget proposal outlines a significant boost to military funding, including development of the “Golden Dome” missile defense system, expanded investments in naval shipyards, the sixth-generation F-47 Next Generation combat aircraft, and modernization of the U.S. nuclear deterrent.
Citi analysts called the proposal “a roadmap to sustained growth” for defense contractors, naming RTX and Lockheed Martin (LMT) as key beneficiaries. Wells Fargo echoed this view, calling the defense budget a “big win for defense stocks.”
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❖ We are keeping Charles Schwab Corporation (SCHW) under review at least until its upcoming annual meeting on May 22, 2025.
We have placed the stock under review despite its blockbuster Q1 earnings report and praises from several Wall Street analysts. An activist shareholder, John Chevedden, has recently submitted proposals advocating for the declassification of Schwab’s board structure, aiming to enhance shareholder influence over the company’s management and make the board more accountable to shareholders. The board has expressed opposition to these changes, but they are scheduled to be addressed in full at Charles Schwab’s annual shareholder meeting on May 22.
Schwab’s core business remains fundamentally sound, and we are bullish on its long-term viability. As a leading brokerage and financial services firm, Schwab has shown resilience through various market cycles, benefiting from a robust client base and a comprehensive suite of investment products. However, the internal dispute introduces additional company-specific uncertainty amid broad market volatility, driving our decision to keep SCHW under a magnifying glass for the next few weeks.
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❖ We are keeping Uber (UBER) under review at least until its earnings report today (May 7) – with a focus on further guidance.
Uber remains a leader in ride-hailing and food delivery – backed by a scalable platform, strong brand presence, and growing international operations. Its asset-light model continues to offer flexibility in navigating economic headwinds, while its mobility services play a critical role in urban transportation markets. However, rising macroeconomic risks could impact its continued strong performance. Tariffs and inflation may weigh on consumer spending, particularly in food delivery, while regulatory uncertainty continues to cloud visibility. Recently, the Federal Trade Commission (FTC) filed a lawsuit against the company – accusing it of deceptive billing and cancellation practices tied to its Uber One subscription service.
Despite these negatives, analysts remain optimistic regarding Uber – rating its stock a “Strong Buy” and citing resilient subscription growth, strong gross bookings from engaged members, and a favorable outlook for the gig economy within the internet sector. Uber’s ride-hailing services, responsible for nearly 60% of total revenue, remain largely “tariff-proof” – a rare advantage in today’s market. Uber’s global reach – operating in over 70 countries and 15,000 cities – also provides a safety net in case of an economic downturn at home. Moreover, its ads business, while still small in terms of revenues, is growing fast and has wide margins – while its digital-native nature shields it from tariffs.
We remain positive on Uber’s long-term platform strength, but recognize that regulatory scrutiny, cost pressures, and consumer demand shifts could impact near-term performance. We will reassess the stock after the company’s earnings report – focusing on guidance, regulatory responses, and macro trends affecting both mobility and delivery segments. Until then, we continue to monitor Uber closely as these dynamics evolve.
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Portfolio Earnings and Dividend Calendar
❖ The Q1 2025 earnings season is way past its peak, but several Smart Portfolio companies are reporting today and in the next several days. These are: Uber Technologies (UBER), Texas Pacific Land (TPL), McKesson (MCK), LPL Financial (LPLA), and Cisco Systems (CSCO).
❖ The ex-dividend date for Parker Hannifin (PH), Howmet Aerospace (HWM), IBM (IBM), and Charles Schwab (SCHW) is May 9, while for Visa (V) it is May 13.
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New Buy: Roper Technologies (ROP)
Roper Technologies is a diversified technology company that acquires and operates niche market leaders, primarily in software and engineered products. With a focus on vertical software solutions for healthcare, education, compliance, and industrial applications, Roper generates a high proportion of recurring revenue and maintains strong free cash flow margins. The company’s portfolio spans multiple end-markets, offering insulation from sector-specific volatility and economic cycles. Roper’s decentralized operating model emphasizes long-term capital discipline, margin expansion, and durable returns on invested capital. Known for its methodical, low-profile approach to M&A, Roper has built a track record of integrating high-quality businesses without disruption. Its steady evolution toward a more software-centric profile positions the firm as a reliable compounder – one that is less exposed to global trade tensions and macro shocks than traditional industrial peers.
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From Bolts to Bytes
Roper Technologies was founded in 1981 as Roper Industries, originally focused on industrial equipment and controls. Its transformation into a high-performing compounder traces back to its strategic pivot in the early 2000s – when the company moved away from its roots in industrial controls and instrumentation to pursue asset-light, high-margin businesses. This shift accelerated further under longtime CEO Brian Jellison, who championed a disciplined M&A model that prioritized durable cash flows, recurring revenue, and decentralized operations. That legacy has only deepened in the past five years.
Between 2020 and 2025, Roper completed a series of acquisitions that reshaped its earnings profile and solidified its move toward a software-heavy portfolio. The 2020 acquisition of Vertafore, a leading provider of insurance distribution software, was a turning point, adding stable subscription-based revenue from a deeply embedded platform. This was followed by the purchases of Frontline Education (K-12 administration), EPSi (hospital financial decision support), and most recently, CentralReach (a SaaS platform for behavioral health providers), each reinforcing Roper’s presence in resilient verticals with limited exposure to economic cyclicality.
These deals expanded the company’s exposure to end markets like healthcare, education, compliance, and insurance – sectors with high regulatory complexity and customer retention – and supported consistent top-line and earnings growth. In parallel, Roper divested several lower-margin industrial businesses, including its Gatan and Zetec units, streamlining the portfolio and improving margin quality.
The company’s investment in digital platforms and cloud-based capabilities has been equally critical. Over the past five years, Roper has upgraded infrastructure across its portfolio to support scalable SaaS delivery and embedded analytics, allowing its operating companies to deepen customer engagement and reduce churn. This has boosted both organic growth and pricing power.
Management has kept capital allocation front and center – using steady free cash flow generation to pay down debt from prior acquisitions while building dry powder for future deals. The company’s modest leverage, coupled with a strong investment-grade rating, has enabled it to remain opportunistic even in tightening financial conditions.
In 2023, Laurence Hunn, who succeeded Jellison in 2018, reaffirmed the company’s strategy by tightening Roper’s focus on software and data businesses. Under Hunn, Roper has leaned further into its proven acquisition playbook – one that emphasizes integration autonomy, cultural fit, and disciplined return thresholds – ensuring the firm grows without sacrificing quality. This evolution has helped Roper consistently outperform peers across both industrial and software sectors.
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Berkshire of Industrials
Roper Technologies operates a distinctive business model that blends the discipline of an industrial holding company with the growth economics of vertical SaaS. While classified as an industrial firm, Roper increasingly resembles a software-driven compounder – acquiring niche businesses that generate recurring revenue, command pricing power, and require little capital to scale. Its portfolio spans sectors like healthcare, education, insurance compliance, and laboratory data systems, with most subsidiaries operating independently under a decentralized framework.
This hybrid identity gives Roper the best of both worlds. From its industrial roots, it retains a focus on efficiency, cash generation, and lean operations. From its software exposure, it captures sticky customer relationships, high margins, and scalable growth. The result is a company with operating margins and free cash flow profiles more typical of software companies than industrial peers – yet without the same volatility or speculative exposure.
Central to Roper’s strategy is its disciplined, low-drama approach to acquisitions. The company does not chase turnarounds or competitive auctions. Instead, it targets founder-led or mission-critical businesses with high customer retention and defensible moats. Once acquired, these companies retain autonomy, preserving the culture and operational model that made them successful in the first place. Roper provides capital, governance, and long-term alignment – not interference.
This model has helped shield Roper from macroeconomic and policy shocks. Over 85% of its revenue is generated domestically, minimizing direct exposure to tariffs or geopolitical trade tensions. Most of its businesses deliver software and data-driven services rather than physical goods, and they serve end-markets with consistent funding sources – such as hospitals, schools, and insurers – that are less sensitive to the business cycle. During downturns, Roper’s decentralized businesses often maintain or grow cash flow, while peers cut back or retrench.
Unlike companies that rely on a single revenue engine, Roper’s portfolio is inherently cross-cyclical. A slowdown in industrial or manufacturing activity may impact one unit, while others in healthcare software or education continue to grow. This built-in diversification adds resilience without complexity.
Roper is often referred to as a “Berkshire of industrials” or a “mini Berkshire with a tech spine” by analysts and long-term investors – and the analogy is quite apt. Roper echoes Berkshire Hathaway’s playbook in the world of vertical software: a quiet compounder that uses cash flow, not hype, to build long-term value. Like Buffett’s empire, Roper acquires high-quality businesses across diverse verticals and holds them for the long term, with a relentless focus on free cash flow and return on invested capital. Its hybrid DNA and countercyclical positioning make it one of the most structurally insulated operators in the industrial-tech universe.
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Earnings, Engineered
Roper Technologies continues to deliver one of the most resilient financial profiles in the industrial-tech space. Its asset-light, recurring-revenue portfolio generates robust cash flow and consistent earnings, even amid macroeconomic uncertainty. While not a hyper-growth story, Roper’s disciplined capital deployment, operating leverage, and margin resilience have made it a reliable compounder. This quiet strength is reflected in ROP’s constant adjusted EPS beats – surpassing analyst estimates in every quarter since Q4 2021.
In Q1 2025, Roper reported revenue of $1.88 billion, up 12% year-over-year, driven by approximately 5% organic growth and 8% contribution from acquisitions. The result beat consensus expectations of $1.86 billion. Adjusted EPS came in at $4.78, up 8% from the prior year, also exceeding estimates of $4.74. Adjusted EBITDA grew 9% to $740 million, reflecting strong contributions from recent acquisitions and solid execution across all segments.
Application Software remained the company’s largest and fastest-growing business line, with revenue up 19% year-over-year and contributing over 40% of total segment EBITDA. Free cash flow stayed strong at $507 million in the quarter, with trailing-twelve-month FCF rising 12% to $2.28 billion, yielding a 31% margin – a level typically seen in top-tier software businesses.
The balance sheet remains conservative. Roper ended the quarter with net debt-to-EBITDA of 2.4x, over $5 billion in M&A capacity, and $373 million in cash on hand. The recent acquisition of CentralReach, a vertical SaaS provider in the behavioral health space, closed in April and is expected to contribute $175 million in revenue and $75 million in EBITDA over the next 12 months.
Following the strong first-quarter results, management raised full-year 2025 guidance. Roper now expects adjusted EPS of $19.80 to $20.05 (vs. prior range of $19.75 to $20.00), above the analyst consensus of ~$19.88. The company also increased its total revenue growth forecast to ~12% (from 10%+ previously), with organic growth still expected at 6-7%.
Roper’s model has historically outperformed in volatile cycles – a pattern supported by its recurring revenue base, diversified end-markets, and low exposure to tariffs or global supply chains. Management expects that resilience to hold in 2025, citing robust demand for mission-critical software and a growing pipeline of high-return acquisition opportunities.
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Premium Blend
Roper’s stock has returned over 11% in the past year, outperforming the S&P 500. ROP suffered a far more pronounced decline than the broad index around the end of 2024, in line with broader weakness across Industrial stocks. However, when tariff panic hit stock markets at the end of February, Roper’s stock barely budged. The S&P 500 is down by over 8% since a February 19 high, while Industrials and Software are down by over 6% – while ROP has lost just over 1% during the same period.
As a result of this outperformance, ROP’s multiples haven’t compressed as much as those of its peers across both Industrial and Software sectors, declining slightly below its long-term averages and remaining above sector averages. However, the premium is well-deserved in Roper’s case, given its recurring, high-margin revenue, capital-light, high ROIC model, best-in-class M&A execution, low cyclicality in earnings, and high U.S. exposure with negligible tariff risk.
Moreover, when compared to peers with similar strategic or capital structure profile in the Industrial and Technology sectors, Roper doesn’t look expensive, coming at the middle of the valuation scale in terms of TTM and Forward P/E, EV/EBITDA, and PEG ratio. This is the case despite delivering stronger revenue growth over the past year and three years, while simultaneously displaying better profitability metrics. Moreover, based on future cash flows, Roper appears to be undervalued by about 25%, reinforcing the strength of its investment case.
Beyond share appreciation, the company rewards its shareholders through dividends. Roper is a Dividend Aristocrat, having consistently increased its payout for 32 years. Although its dividend yield of 0.56% is still modest, the company’s long track record, strong financials, and low payout ratio signal continued dividend growth for years to come.
Taken together, the stock’s recent resilience, balanced valuation, and consistent capital discipline position it as a rare compounder with both defensive and structural strengths.
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Investing Takeaway
Roper Technologies is a high-margin, capital-light compounder operating at the intersection of industrial discipline and software economics. Through a portfolio of recurring-revenue businesses spanning healthcare, education, and compliance, the company delivers strong free cash flow, high returns on capital, and low earnings volatility. Its decentralized model and best-in-class M&A execution have driven consistent outperformance, even during periods of macro shocks and tariff risk. Despite recent stock gains, Roper trades at valuation levels in line with peers while offering superior profitability and cash generation. With a 32-year dividend growth streak, expanding software exposure, and a robust acquisition pipeline, Roper offers a rare blend of structural resilience, financial strength, and long-term compounding potential – quietly built, but visibly enduring.
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New Sell 1: Public Service Enterprise Group (PEG)
Public Service Enterprise Group is a regulated utility and power generation company based in New Jersey, with operations spanning electricity transmission, distribution, and carbon-free energy generation. PEG has long been viewed as a defensive name in uncertain markets, offering a stable dividend and predictable cash flows.
That’s precisely what made PEG an appealing portfolio stabilizer when we added the stock less than a month ago. With its regulated earnings base, growing clean energy investments, and a solid dividend profile, PEG seemed like a sensible pick in a choppy market. However, the stock has since dropped by over 4%, undercutting its defensive thesis and exposing structural and valuation risks that now outweigh the potential reward.
PEG’s latest quarterly results were disappointing. Adjusted operating EPS of $1.31 missed analyst expectations, and although revenue rose 9.5% year over year to $2.76 billion, that growth was largely driven by favorable rate cases and mild weather, not underlying operational outperformance. The company reiterated its full-year EPS guidance of $3.60 to $3.70, but execution risks remain elevated amid rising input costs and regulatory uncertainty in New Jersey’s evolving energy landscape.
Meanwhile, PEG continues to trade at a premium to peers despite slowing earnings momentum. The stock’s forward P/E remains above the regulated utility average, and multiple Wall Street firms have trimmed their price targets following Q1 results. Technically, the stock has broken below its 50-day and 200-day moving averages, signaling a potential bearish trend reversal. This is not the behavior we want from a portfolio stabilizer.
Simply put, the thesis hasn’t held up. PEG was intended to serve as a low-volatility anchor – but with the stock now in decline and valuation support eroding, we believe it’s time to step aside. We may revisit PEG in the future should the valuation reset more attractively or visibility into rate-base growth improves. For now, however, we are exiting the position.
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New Sell 2: Amazon (AMZN)
We have held Amazon in our “Under Review” bracket for a while, and now – following the company’s earnings results and guidance, as well as other developments – the verdict is in. Although Amazon remains a highly profitable business empire, we are selling it from the Portfolio due to overlap, risk concentration, and higher-conviction alternatives.
AMZN overlaps significantly with our existing tech exposure – including Microsoft, Alphabet, Oracle, and Broadcom – via cloud, AI, and infrastructure, without offering superior execution in those segments.
Although Amazon’s AWS still commands ~31% of global cloud infrastructure, with many large enterprises locked into long-term contracts, its revenue growth rates in recent quarters have been significantly slower than those of Microsoft’s Azure or Alphabet’s Google Cloud (GCP). In addition, although AWS operating margins rebounded in Q1, margin growth is being partially offset by reinvestment into costly custom chips and infrastructure – supportive of long-term growth, but pressuring short-term earnings. Meanwhile, while Azure and GCP also remain sensitive to reinvestment cycles, Microsoft has more diversified high-margin revenue to offset capex, and Google is still in margin expansion mode.
Notably, two of the Smart Portfolio’s strongest-conviction holdings – Broadcom and Oracle – add to the feeling of redundancy regarding Amazon. AVGO supplies core infrastructure for AI and cloud through its dominance in custom silicon, networking chips, and accelerator hardware – providing exposure to secular AI/cloud growth, but in a leaner, more profitable, and less cyclical way than AMZN. Oracle, meanwhile, competes directly with AWS in enterprise cloud and IaaS, offering differentiated growth in mission-critical workloads, backed by strong free cash flow and margin expansion. Together, AVGO and ORCL deliver cleaner exposure to the same secular trends with better capital efficiency, lower regulatory exposure, and more focused business models.
One of the underappreciated bright spots for Amazon is its ads revenue, which is hard to discern as it is buried under Retail – but it could eventually become Amazon’s second-largest profit contributor, carrying wide profit margins similar to Google Search and registering faster growth than AWS. However, the Portfolio already has sufficient exposure to the retail media segment through Google, while the apparent economic slowdown makes it vulnerable to macro headwinds – specifically through marketing budget pullbacks from SMEs, who represent a large chunk of Amazon’s ad buyers – and increased competition for every budget dollar, pressuring pricing and reducing monetization.
Moreover, Amazon takes a double hit now due to its Retail exposure. Its ads – which have become a $50B+ annualized run-rate business, increasingly subsidizing retail operations – are tied directly to product listings and e-commerce volume, making them vulnerable to a slowdown in consumer demand amid a weaker economy.
Retail remains Amazon’s primary revenue source, accounting for over 66% of the total. Meanwhile, with at least 30% of marketplace volume originating from China, AMZN is highly exposed to higher COGS, logistics strain, and pricing friction amid the escalating U.S.-China trade war. Amazon’s e-commerce margins are already thin, heavily subsidized by AWS and ads. Now, rising costs due to tariffs and other headwinds – coupled with weak discretionary demand – notably increase further margin compression risk. With the Smart Portfolio’s holding of Kroger – a more defensive, staple-heavy retailer with minimal China exposure, vertical integration, stronger pricing stability, and less earnings volatility – AMZN’s retail unit adds cyclical risk, not stability.
Despite declining by about 15% year-to-date, Amazon carries a premium valuation that may add to pressure on the stock amid macro and trade headwinds. Although we remain strongly positive regarding AMZN’s long-term prospects – and plan to revisit it in the future – the combination of high multiples, short-term pressures, and business overlap with higher-conviction plays supports our decision to sell the stock.
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Smart Investor’s Winners Club
The 30% Winners Club includes stocks from the Smart Investor Portfolio that have risen at least 30% since their purchase dates.
The markets have risen and then fell, but our Winners list remained unchanged, still holding 12 stocks: GE, AVGO, ANET, HWM, TPL, EME, TSM, ORCL, APH, PH, IBKR, and CRWD.
The first contender is still BRK.B with a 21.36% gain since purchase. Will it join the Club, or will another stock outrun it to the finish line, again?
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