$800 for a vacuum cleaner? Making cleaning cool seems to be very profitable. So it $IRBT a clean cut investment?
Key Stats
| Ticker | IRBT |
|---|---|
| Sector | Advanced Electronic Equipment |
| Latest price | $73.76 |
| Value | $2,041M |
| Daily vol | $152M |
| Date | 26 September 2017 |
| Links | SEC Edgar, irobot.com |
1. Are you into robots... boring ones?
It turns out that robots are boring. Car plant assembly lines, toy dogs and vacuum cleaners. Phew, no SciFi here.
Though the actual technology inside an iRobit is cool: mapping, navigation, mobility and artificial intelligence. But the thing you buy is a vacuum; mop; or pool cleaner!
And what's really exciting, is that like Apple and iPhone's there aren't a lot of alternatives, Dyson is the only real one.
That leading dynamic could be sustained, as they spend heavily on R&D and defend their patents across the globe.
As of December 31, 2016, we held 368 U.S. patents, more than 550 foreign patents, additional design registrations, and more than 400 patent applications pending worldwide. Our U.S. patents will begin to expire in 2019.
Moving nicely at the top
There's been a healthy increase in the topline, though it's not a high margin business, with an operating profit of $58m on $661m of sales.
The US is about 50% of all sales, and over 70% of sales are via their 15 largest retailer / distribution partners.
| Metric | 2012A | 2013A | 2014A | 2015A | 2016A |
|---|---|---|---|---|---|
| Revenue | $436m | $487m | $557m | $617m | $661m |
| EPS | $0.61 | $0.94 | $1.25 | $1.47 | $1.48 |
But in recent years, IRBT has seen it's gross margin decline and increased it's investment in brand. If we look at the forecasts for 2017 and 18, these investments look like they will pay off at the top line... not the bottom. In fact a considerable part of that jump in sales may be because they are buying some of their distributors.
| Metric | 2016A | 2017E | 2018E |
|---|---|---|---|
| Revenue | $661m | $852m | $980m |
| EPS | $1.48 | $1.58 | $2.63 |
And like other "gadget" stocks (dare I say Fitbit or GoPro) the 4th quarter is a big deal. What? People buy these as presents?
Investment mode?
With $260m of net cash on the books, perhaps IRBT is in investment mode. Furthermore, they don't pay a dividend. But did buy back circa $100m of stock last year as their cash balance has ramped to over 10% of their market value.
2. How do they compare?
Dyson isn't listed, and there' no "robotics" peers of any size, so let's look at consumer appliance and related products. On this front IRBT doesn't stand out as best in class. Though that's nothing to worry about.
| Companies | Latest Sales | Operating Profit | Return on Equity |
|---|---|---|---|
| iRobot Corporation | $733M | 12% | 15% |
| Newell Brands Inc | $15,411M | 14% | 10% |
| Whirlpool Corporation | $21,037M | 10% | 16% |
| Electrolux AB (ADR) | $15,342M | 8% | 28% |
| Middleby Corp | $2,281M | 23% | 22% |
| Tupperware Brands Corporation | $2,250M | 18% | 76% |
It's when we get to valuation that I start to worry.
| Peers | Valuation | Forecast PE | Long-term Growth | Dividend Yield | FCF Yield |
|---|---|---|---|---|---|
| IRBT.O | $2,041M | 46x | N/A | 0% | 4% |
| NWL | $20,075M | 14x | 10% | 2% | 11% |
| WHR | $12,939M | 12x | 12% | 2% | 13% |
| ELUXY.PK | $10,932M | 17x | N/A | 3% | 14% |
| ELUXB.ST | $87,259M | 16x | 9% | 3% | 13% |
| MIDD.O | $7,013M | 22x | 8% | 0% | 5% |
| TUP | $3,056M | 13x | 12% | 5% | 12% |
I'm struggling to understand why it's worth over twice the earnings multiple of the most valuable peer. Especially with most peers on double digit earnings growth.
Okay the current 46 times earnings is midway between the two year range of 19 to 64 times earnings... but what justified this stellar valuation jump? I don't get it.
Sure the company has beaten forecasts for the last three years, quarter in quarter out, but the management teams' outlook in August failed to impress and the forecasts for 2017 got slashed. Though maybe that was their recent deal to buy their largest European distributor.
Maybe the brokers still aren't looking at their 2018 figures, and $2.63 a share might be a little blue sky. Though, management talked about a $1.80 to $2.00 a share for 2017, pre-acquisition expenses.
3. And Wall Street says?
And although Wall Street's target price is anchored at $90, a healthy 20% above the current price, they say "Hold".
In fact, Wall Street has called this one nicely... saying Buy, Buy, Buy all the way to May this year. Cutting to a Hold when the stock broke thro' the $100 mark.
4. One for the pre-Christmas list?
I don't get the valuation, but I can see why sentiment can drive the stock up in the Christmas quarter.
In fact, look at the quarterly high the last 2 years...
| Quarter High | Q1 | Q2 | Q3 | Q4 | Q4 v Q3 |
|---|---|---|---|---|---|
| 2016 | $36 | $39 | $45 | $61 | +36% |
| 2015 | $35 | $35 | $33 | $38 | +13% |
The Christmas quarters have been good to investors in 2015 and 2016, even if they bought at the high the previous quarter. Though this pattern was not the case in 2014 or 2013.
I'm not a momentum guy, even if there is a "Black Friday" trade to have. And with technicals driving the stock down at the moment, it feels like there could be a cheaper entry price coming.
Yes a great product, but I'm getting sticker shock when I see the price. Am keeping my mop and brush for now. ;)
View the archive of Stock a Day posts at r/stockaday.
Disclosure:
I have no position in the stocks mentioned. However I may initiate a position within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Reddit, moderators, and the author do not advise making investment decisions based on discussion in these posts. Analysis is not subject to validation and users take action at their own risk.
Author:
- u/shane_stockflare
- Shane Leonard, CFA
Submitted September 26, 2017 at 08:32AM by shane_stockflare http://ift.tt/2htRnjA
