iRobot is Hoping to Make a Mint from this Deal
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I love my robot. The last thing I do before I head out to work in the morning is press the on button of my iRobot (NASDAQ: IRBT) Roomba and let it do the dirty work for me. I come home at night and it has usually found its way back to the charging dock. The floors, while not perfectly clean are at least satisfactory so that my wife and I have never given another thought to owning another vacuum.
My history with iRobot is one steeped in the philosophy of Peter Lynch, just in reverse. I bought shares of the company well before I ever bought my Roomba. I believed in the potential of the company to really be a game changer with their technology offerings. In fact, it was because I was a shareholder that I decided to be a customer. Unfortunately, my Roomba seemed to have had better returns than iRobot’s stock over the years.
The company for their part is still diligently working to grow their offerings. Most of their newest products are the result of their own R&D efforts. This time though they’re buying a product to be added to their offerings by acquiring Evolution Robotics for $74 million in cash.
Evolution makes the Mint and Mint Plus automatic floor cleaning robots which take a different approach to cleaning floors than iRobot’s Roomba and Scooba machines. The Mint is designed exclusively for hardwood floors and it dusts and damp mops using popular cleaning cloths made by Procter and Gamble’s (NYSE: PG) Swiffer brand among others.
The transaction is expected to be dilutive to earnings both this year and most of next year before it begins to add to earnings in the fourth quarter of next year. The Mint products are expected to add about $22 to $24 million in revenue next year. What’s intriguing about this deal is the Swiffer is a half billion dollar product line for P&G. If they can further tap into those hard working folks who don’t have the time to keep up with their hard wood floors they can really clean up.
In addition to the Mint products, iRobot is acquiring additional technology and intellectual property which could eventually create value for shareholders. It’s their technology and IP that’s been driving the company for years. They have been selling robots to the government to keep our soldiers out of harms way and are hoping to eventually make their way into other markets such as healthcare and hospitality with their Ava platform.
The real question though is where does iRobot go from here? They’ve grown revenue by an average of 15.5% over the past five years. However, their Defense and Security business is under pressure from budget cuts. When looking at further applications we’re still years away from the day where robots develop into their Hollywood hyped future.
The one market where the future looks bright is in the health care market. Intuitive Surgical (NASDAQ: ISRG) has certainly made their investors a mint with their da Vinci robotic surgery system. They’ve grown their revenue twice as fast as iRobot over the past five years on a much larger base. Yet where they’ve succeeded others such as Mako Surgical (NASDAQ: MAKO) and Hansen Medical haven't made much traction. Mako’s grown their revenue by an astounding 200% annually over the past five years yet they’ve been unable to turn a profit. Hansen also has grown revenue but like Mako can’t turn a profit.
Those three companies have been working to use robotics to improve surgical outcomes. iRobot, through a partnership with InTouch Health is taking a different approach. They are combining InTouch’s state-of-the-art telemedicine solutions with iRobot’s Ava program for a telemedicine robot. Given that the health field is open to robotics the product, RP-VITA does have some potential.
While it will be interesting to see how RP-VITA does in the marketplace, for now iRobot is all about the consumer market and their acquisition of Evolution is another push in that direction. Their revenue was evenly split with their D&S business just a few years ago but a combination of that business slowing and the consumer business growing has it now contributing 75% of their revenue this year. Their ability to leverage their strength in branding and distribution will be key if they hope to make a mint from the Evolution deal.
For the company to really take things to the next level they'll have to move beyond the consumer market place. They have the intellectual property and technology to eventually make that happen. For now though, their acquisition of the Mint product line will help them further clean up their market share lead in that important market.
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latimerburned owns shares of Intuitive Surgical, MAKO Surgical , iRobot , and an options position on The Procter & Gamble Company. The Motley Fool owns shares of Intuitive Surgical and MAKO Surgical. Motley Fool newsletter services recommend Intuitive Surgical, iRobot , MAKO Surgical , and The Procter & Gamble Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.