When Will the Robots Take Over?

By Matthew DiLallo - April 17, 2012 | Tickers: AMZN, BBBY, IRBT, KSS | 0 Comments

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A couple years back our vacuum cleaner went kaput and as a long time shareholder of iRobot (NASDAQ: IRBT) I wanted to give their Roomba a try.  Using my shareholder discount on a refurbished model, I was able to pick one up for just over a hundred bucks.  I’ve gotten more than my money’s worth out of the little guy but its time for him to retire after a job well done.  My search for a replacement makes me wonder why there isn’t a Roomba in every home. 

While iRobot is known by most for their household cleaning robots, they also make a lot of money on the government and industrial side of things, however, that is a topic for a later date.  I’m more interested in the huge opportunities that continue to lie ahead in the consumer marketplace.  They currently control just 8% of the $1.75 billion dollar annual marketplace for vacuums over $200 in the US, which grows to about $6 billion worldwide.  When you look at the costs of their product vs. a traditional upright product, its amazing to me the value they provide.  Before we talk about value, I want to look at the cost and why that cost is truly a bargain when put in the correct context.

Personally, I am looking at the iRobot Roomba 530 or the 560 for our home, which are their current entry-level models.  At iRobot’s online store the 530 runs about $349.99 and the 560 will set you back $399.00.  When looking at them at one of my wife’s favorite stores, the 530 is on sale at Kohls (NYSE: KSS) for $341.99, However, the best prices were at both Bed Bath & Beyond (NASDAQ: BBBY) and Amazon.com (NASDAQ: AMZN) where its $299.99 for the 530 and $349.99 for the 560.  Other than just the $50 price differential, the real difference between the two is that the 560 has an on-board scheduling module that allows you to preset up to seven times per seek for the Roomba to clean.  For me, since I am the last one out of the house in the morning I have to make sure to press the start button before I leave or the floors don’t get clean so that little addition would be a nice benefit.  Personally, I think its worth that extra $50 to be saved from coming home to dirty floors and my wife reminding me I forgot to turn on the vacuum again. 

I spent a bit of time on Amazon.com looking for what it would cost someone to replace their upright vacuum and there are a lot to choose from.  For example, a decent Eureka vacuum by Electrolux (Nasdaq: ELUXF) can be found for under $200 and there were several products by Dirt Devil and Hoover on that low end as well.  On the other end of the spectrum at $300 plus there were several highly rated Dyson models.  Given that iRobot is targeting the $200+ vacuum marketplace, I’m  really just putting a dollar figure on my time spent vacuuming and whether it’s worth $150 more for the machine (assuming I went with the 560 from Amazon) instead of a comparable product.  If you think about those $150 extra dollars it really starts to become a really good value proposition for a busy household.  If time is money and it would take me about a half hour each week to vacuum our home then the Roomba pays for itself in less than six months.

Their products are far from the novelty they were when they were first brought to market, they are a true value to their customers.  The company isn't just about cool tech gadgets, iRobot is profitable and committed to creating shareholder value.  They are committed to three key tenants that will drive value to their shareholders: Growing EBITDA and consistantly generating Free Cash Flow, a mid-teens adjusted EBITDA margin and a high single digit operating cash flow margin.  This has helped them generate about half a billion in sales and just shy of $70 million of EBITDA in 2011.  Their future looks solid with projected earnings of $0.91 a share this year and growing to $1.26 a share in 2013.  While this is down from the $1.32 they earned in 2011, you can see from these charts that their revenue and earnings are all heading in the right direction.  Right now however, the company is heading toward value territory after getting knocked down after their last earnings release.  Shares trade for just 17 times trailing earnings and they have about 20% of their balance sheet in cash.  While iRobot will continue to be a growth stock, they are no longer just a story stock.  They have solid earnings and cash flow to go with their exceptional fundamentals. 

iRobot is here to stay and I think the stock is going to be a very good long term winner for investors.  Their biggest hurdle remains convincing homeowners that robots are for real and they really do a good job cleaning the floors.  iRobot is the first mover in the industry and they have plenty of room to grow as more people consider the benefits of having a robot do the dirty work and as their current customers come back to upgrade their well worn machines.  With currently just 8% of the US market, I see no reason why they can't keep growing their existing market share over the next few years.  In Spain one in four vacuums sold are robots and while I don't see that kind of penitration here anytime soon, each 1% of market share they can take in the US is good for another $17 million in sales and over a million of that will fall to the bottom line.  They are beginning to build brand awareness, which should enable them to be the go to brand for consumer robots, whether that be in heath care or furthering their consumer product line, the potential is immense. 

One a related note, I’d love to hear your robot story, especially if its worth the extra $50 to go with the 560 or should I be looking past the $100 higher price tag by looking up to the 700 Series?

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