IRobot (IRBT) Up 14% on Stellar Profit Growth

by Ryan Fitzwater, Director of Research, The Oxford Club
StockGrader

I have been an avid fan of iRobot Corp. (Nasdaq: IRBT) ever since an old roommate bought one of the company’s automated Roomba vacuums for our apartment over five years ago. We were both bachelors at the time, and very little “self-cleaning” was taking place at the time.

Luckily for us, vacuuming was one job getting done on a weekly basis once Roomba came to live with us. If I have never said it before, thank you, Roomba.

And in case you don’t know, the company isn’t just in the home-cleaning business. It also supplies reconnaissance and bomb-disposal robots for the military, police forces and first responders. Another job my roommate and I continue to stray away from.

IRobot Cleans Up the Third Quarter

Today I was happy to see iRobot announce some stellar third quarter results. I really want the company to stick around and continue to take us into The Jetsons age.

After yesterday’s close, iRobot reported that revenue grew 15% to $143.5 million. And profits for the quarter jumped 87%, from $0.26 a share last year to $0.48. Analysts were expecting revenue of $134.33 million and earnings of $0.33.

Gross margin also improved from 43.4% a year earlier to 47.3%.

The company stated that a bulk of the growth came from the 19% increase in home robot sales year-over-year. Seems like more bachelors might be discovering how to increase their home-cleaning laziness.

IRobot also saw a 6% increase in sales for its defense and security business. And that division is currently sitting on a $25 million backlog as of the end of this quarter.

The third quarter was such a success that management raised its earnings-per-share (EPS) forecast to $1.20 to $1.25, from $1.10 to $1.20, for the year. The stock is up 14% today as a result.

Ignore the Talking Heads and Focus on Growth

At Investment U, we are constantly hammering that earnings growth is the only thing that really matters for stocks in the long run. As our Chief Investment Strategist Alexander Green puts it, it’s easy for investors to fall prey to the “Conspiracy of Misinformation” the media is persistently throwing at us.

The recent market pullback is a perfect example of this. While everything seemed to be falling apart at the seams for the market, companies were still out there doing their best to offer better products at a cheaper price to consumers, in an effort to boost their bottom line.

As I mentioned above, in the most recent quarter iRobot did just that. And it did it while the sky was falling for the markets.

Excluding today’s price jump, shares were down around 15% over the last three months. The S&P was down just over 2% over that same period.

With today’s 14% increase in share price, the company has a 2.7% gain since the market downturn. Even with today’s price jump, I believe that iRobot is still an attractive buy. And for the longest time I have considered it a top potential takeover target.

While we cannot predict takeovers, we can determine if the company is on solid financial footing with our Investment U Fundamental Factor Test. Let’s see if a good grade shakes out:

 

Earnings-per-Share (EPS) Growth: We already know that iRobot posted an 87% boost in EPS for the third quarter. Big check mark here.

Price-to-Earnings (P/E) Ratio: The company currently has a P/E of 28.57, a few points below the industry average of 31.20.

Debt-to-Equity Another thing I love about iRobot is that it is a zero debt company. It has no long-term borrowings on its balance sheet, giving it a 0% debt-to-equity ratio. Potential takeover bidders would have an easy time selling the lack of debt load to its board.

Free Cash Flow per Share Growth : IRobot unfortunately saw free cash flow drop $10.5 million this quarter. It has seen free cash flow drop in the last three quarters for a total of $23.8 million. The company currently sits on over $148 million in cash, so it has some cushion here, but I would like to see this improve in the future.

Profit Margins : Back to the green check marks. IRobot’s profit margins currently clock in at 10.18%, slightly above its competitor average of 9.72%.

 Return on Equity Return on Equity : IRobot couldn’t close out our last key metric. Its ROE of 9.03% is a few points below the industry average of 12.35%.

*Why did we look at these specific metrics? Find out more here.

Fundamental Factor Test Score

B: Buy with Caution (Matches four key metrics, no less)

Please note that our fundamental factor checklist is just the first step in performing your own due diligence. There are many other factors you should consider before investing. That's why The Oxford Club offers over a dozen newsletters and trading advisories all aimed at helping investors grow and maintain their wealth. For more details, click here.

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