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 Click to see monthly returns in table format!

Lists

50 Crazy Facts About Japan You Won’t Believe

Top 10 Least Expensive Hybrid Cars to Save the Planet With

The 10 Biggest ‘Gate’ Controversies in History

The 10 States with the Highest Nursing Shortages Leaving Their Hospitals Depleted

The 10 Best Value Investment Blogs that Every Investor Must Read

The 6 Cheapest Boarding Schools in Europe 2015

The 5 Most Expensive Cars To Insure in the World

The 10 Most Common Genetically Modified Foods

10 Self-Made Billionaires Who Came From Nothing

The 10 Most Expensive Cities to Live in North America

The 13 Most Expensive Headphones in the World to Represent

The Top 20 Wealthiest Soccer Teams in 2014

4 BuzzWorthy Cannabis Stocks And Some Smoking Derivative Plays

The 10 Healthiest Fast Food Chains in America to Dine At

The 5 Most Expensive Cat Food Brands You Can Spoil Your Kitty With

The 6 Best eCommerce Platforms for Small Businesses

The 10 Worst Mistakes an Entrepreneur Can Make

The 5 Most OP Characters in League of Legends to Carry Games and Crush Foes With

The 5 Best Foods to Eat Before Running that Will Help You Pound the Pavement

10 Glaring Plot Holes in The Walking Dead that a Zombie-Filled Bus Could Drive Through

The 5 Biggest Celebrity Stoners Who Love Their Reefer

The 10 Most Overrated Movies Of All Time by Out-of-Touch Critics

Top 6 Least Expensive Cruise Destinations For 2015 that Will Take You to Paradise

10 States with Lowest Substance Abuse Rates in America

The 14 Most Watched TV Finales Ever

The 10 Best Selling Role Playing Games of All Time for PC

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

How to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

The 15 Most Common Phobias in America that Induce Fits of Panic

Top 6 Least Expensive Tourist Destinations in 2014

Jim Goetz, Peter Fenton, Jim Breyer: Top 6 Venture Investors for 2014

Top 15 Billionaires in 2014

5 Pitfalls To Avoid When Buying a Franchise

Top 20 Medical Schools in the US – 2014 Rankings

4 Business Strategies that Turned Jamie Oliver into the World’s Richest Chef

6 Qualities That Make You A Good Team Player

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!