Does iRobot’s Acquisition Make It A Buy?

iRobot CorporationiRobot Corporation (NASDAQ:IRBT) has a strange customer base. The company is best known for its automated vacuum cleaner robots under the Roomba brand, but has also generated some business over the past several years from making defense and security robots focused on sales to the U.S. government for use in Iraq and Afghanistan. While its business in this segment is declining, it is notable that management has a history of aggressively exploring other markets in order to achieve growth, though this might not be much of a positive for investors who would prefer a more focused, consumer-oriented company.

These investors, however, should be quite pleased with the latest news out of iRobot: it has purchased Evolution Robotics, which makes a cleaning robot specialized for hard-surface floors, for $74 million in cash. iRobot Corporation had about $160 million in cash and cash equivalents on its balance sheet at the end of the second quarter, and another $20 million in short term investments, versus only about $75 million total in liabilities. Therefore, the deal should not have too much of an impact on liquidity. According to iRobot’s press release, the purchase of Evolution Robotics will increase 2013’s revenue by about $23 million. Working off of iRobot’s net income margin for the first half of 2012 (6.6%) this would yield an extra $1.5 million in earnings, though the company also expects transaction-related charges in the fourth quarter of this year and during 2013. iRobot Corporation is in need of growth to maintain its stock price- it trades at 22 times trailing earnings, and 21 times forward earnings estimates- and this is how it has decided to deploy its cash.

iRobot’s own revenues were up slightly in the second quarter of 2012 compared to a year ago. Cost of goods sold was down but higher selling and marketing expenses caused an 8% decline in net income. Due to a poor first quarter the company’s earnings per share for the first half of the year were about half what they were in the same period in 2011, though cash flow from operations was closer to break-even than it was at the same point last year.

There have been a number of insider sales at iRobot this year. While some degree of insider selling is expected as officers and Board members diversify wealth away from their own company, it is something to note (though a good deal of the sales came early this year at prices above $32/share, compared to the current price of about $26). Our database of 13F filings does not show much interest in the stock among hedge funds, with the largest position (worth about $20 million) belonging to Nantahala Capital Management. Nantahala, run by Wilmot Harkey and Daniel Mack, increased its position by 74% in the second quarter of 2012 to about 940,000 shares; this made it one of the fund’s top ten 13F holdings (find more of Nantahala’s favorite stocks).

With its renewed focus on consumer goods, iRobot can be compared to two types of companies: appliance companies such as Whirlpool Corporation (NYSE:WHR) and Spectrum Brands Holdings, Inc. (NYSE:SPB) and household electronics companies such as Sony Corporation (NYSE:SNE) and Panasonic Corporation (NYSE:PC). Both of the electronics companies have been struggling, with their stock prices down 34% and 26% respectively over the last year. Sony is expected to be barely profitable in its next fiscal year, while the sell-side sees a strong recovery at Panasonic to the point where it turns in a forward P/E of only 9. Spectrum Brands is also digging itself out of a big hole, with a high trailing price-to-earnings multiple but a forward P/E of 14. Whirlpool is the most classically value investment of the five stocks, trading at 11 times trailing earnings and 10 times forward earnings estimates. It is also considerably larger than iRobot at a $6.5 billion market cap, even after a 62% gain in its stock price over the last year. We think that it is the best buy. iRobot’s purchase of Evolution is interesting, but barring significant synergies we don’t see the acquisition bumping earnings per share by enough to make it as good a value as Whirlpool.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

On the Move: The 10 Fastest Growing Businesses in 2015

Fast Money: The 10 Highest Paying Fast Food Restaurants

Mixing It Up: The 14 Best Music Mashups of 2014

Rito Pls Buff: The 10 Least Played Champions in LoL Season 4

10 Covers of Popular Songs that are Better than the Originals

Must See TV: The 9 Most Anticipated Shows of 2015

The 15 Biggest Box Office Bombs of All Time

10 Things The World Can’t Stand About Americans

Picture Perfect: The 6 Smartphones with the Best Cameras

The 10 Best Countries To Work In the World

A Profitable Day At The Track: 5 Tips For Betting On Horses

Tearing You Apart: 6 Bad Habits That Ruin Relationships

Learning on the Job: The 6 Biggest Mistakes Parents Make

Shopaholics Rejoice: The 12 Biggest Malls in the World

Fright Night: 10 Horror Movies Based on True Stories

Mach Mania: The 10 Fastest Jets in the World

Military Heavyweights: The 10 Countries with the Most Tanks

All In: The 7 Richest Poker Players in the World

Abracadabra: The 10 Best Magicians in the World

The 10 Richest Asian Countries in the World in 2014

Eyes in the Sky: 10 Things You Need to Know About Drones

Rising Stars: The 6 Best Silicon Valley Startups

Military Muscle: The 5 Most Advanced Armies in South America

All that Glitters: The 7 Most Luxurious Jewelry Brands in the World

5 Things You Didn’t Know About ISIS but Should

Empowering Your Money: The 5 Best Energy Stocks to Invest In

The 11 Best Android Apps You Can’t Get on iOS

The 10 Most Important International Conflicts in 2014

Mood Enhancers: The 20 Most Uplifting Songs of all Time

Lover Beware: The 8 Countries that Cheat the Most

Breath of Fresh Air: The 25 Countries with the Best Air Quality on the Planet

Singles Beware: The 8 Worst Mistakes Made on First Dates

Healthy and Happy: The 10 Countries with Lowest Healthcare Costs

The 6 Best Company Team Building Activities to Build Workplace Camaraderie

Ships Ahoy: The 10 Busiest Shipping Ports in the World

10 Productivity Tips to Save You Time and Help You Do More With Less

Grab a Bite: The Most Popular Fast Food Restaurants in America

Friday Night Thirst: The 10 Most Popular Cocktails in the World

The 6 Greatest Unsolved Mysteries We May Never Figure Out

7 Useless Products You Never Should’ve Bought

The 5 Reasons Why You’re Single and Miserable

The 7 Most Addictive Foods in the World We Can’t Stop Eating (Even Though We Should)

5 Amazing Places You Can Swim with Dolphins

The Top 7 Most Livable Countries In The World

The 10 Most Expensive Baseball Cards Ever Pulled From A Pack

The 5 Easiest Second Languages to Learn for English Speakers

Silver Spoon: The 6 Richest Families in the World

The 20 Countries with the Largest Prison Populations in the World

The Top 10 Richest Actors in the World

The 10 Best Airline Stocks to Invest In Before They Fly Too High

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!