Author: Riddhi Ruparelia
Covestor model: Long Term Growth
Disclosure: Long IRBT
As the name suggests, iRobot (IRBT) makes robots of various kinds. The company, founded by a team of MIT engineers and run by founder Colin Angle is a leading pure-play company in the robotics space.
Robotics is more prevalent today than one can imagine. That is especially true in industrial applications that are hazardous for humans, need to perform repetitive tasks or need a high level of accuracy. Thus robotics is employed in variety of applications from manufacturing, packaging, material movement in warehouses, assembly line waste treatment and automobile assembly. The list goes on and on. Therefore, robotics is an integral part of many company’s products that serve these applications.
What makes iRobot different though is its focus on consumer and defense applications. iRobot has been successful in developing products for defense applications, sometimes with paid research, and applying such research successfully to consumer applications. As a result, iRobot is able to offer an attractive price point for consumer products while sustaining high profitability.
With the US government trying to balance the budget and reduce defense spend, iRobot’s defense business saw a significant drop in first half of 2012. This hurt the top line and bottom line which in turn caused the stock to drop from around $38 in January 2012 time frame to around $19 in July 2012 time frame. The stock has bounced back from the lows to around $25 by end of August.
What makes the stock very attractive at this point is the accelerating growth in iRobot’s home robots, led by the Roomba vacuum cleaners. Here are some numbers from iRobots’ last four quarters’ earnings releases.
2Q11
Total revenue:$108.1M
Homo robots revenue: $63.8M
Home robots as % of total revenue 59%
Home robot units: 328K
3Q11
Total revenue:$120.4M
Homo robots revenue: $72.3M
Home robots as % of total revenue 60%
Home robot units: 337K
4Q11
Total revenue:$130.8M
Homo robots revenue: $74.4M
Home robots as % of total revenue 57%
Home robot units: 358K
1Q12
Total revenue:$97.8M
Homo robots revenue: $81.5M
Home robots as % of total revenue 83%
Home robot units: 392K
2Q12
Total revenue:$111.4M
Homo robots revenue: $96.0M
Home robots as % of total revenue 86%
Home robot units: 426K
As you can see, in the second quarter, the home robot business not only grew but it more than compensated for a drop in defense business and brought iRobot back to positive growth trend. Better yet, the home robot segment is accelerating growth in revenue and units shipped. 2Q12 saw this segment grow by 50% in revenue over 2Q11 whereas year over year growth in 1Q11 was 20%.
The best part is this: the home robot segment has seen consistently increasing ASP and gross margins over last four quarters. Also, the growth in home robots has been strong both in domestic and international markets.
Moreover, it seems that the company has seen the worst in the defense business. Based on management forecasts in the Q2 release, the second half of 2012 should see growth in both the home and defense segments over first half of 2012.
With enterprise value over EBITDA of 9.79 (according to Yahoo Finance on 9/3/2012) the stock is currently trading like a value stock with little growth expected. However, as defense business stabilizes and home robot growth gets strongly reflected in top and bottom line growth, I believe that earnings and multiples are likely to grow rapidly. We believe iRobot will soon be back to the $38 price it saw in January – only to grow further from there this time.
