Program Your Portfolio With This Multi-Bagger

Margie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The coming robotics revolution will be lifting these companies' share prices like a hot air balloon. Robots are going to be doing jobs more efficiently than any human, without tiring, and without complaining, (unless programmers somehow install an undesirable personality).  

With Google (NASDAQ: GOOG) coming out with the driverless car, Toyota (NYSE: TM) using robots for laser welding and government subsidized robotic helpers for its aging population, and Honda’s (NYSE: HMC) Asimo- its million dollar futuristic robot and its slightly cheaper $2,700 robotic lawnmowers, plus Amazon (NASDAQ: AMZN) purchasing Kiva Systems for $775 million to make their warehouses more efficient, we are right now at the beginning of a trend of robots becoming more and more ubiquitous worldwide.

The above companies I mentioned will all benefit from their robotic divisions, but I want to concentrate on a true robotics play which I believe will do very well for you as part of your portfolio.

iRobot

You might not know the company, but you likely have heard, seen, or used the Roomba vacuum cleaner, which, believe it or not, is over 10 years old. Of course, the product has advanced since its debut, and is in many homes, including my own (April of this year) where it rides around my carpets picking up cat hair.

I am a midlevel adopter, and while I certainly won't be the first of my friends to buy a new gadget, I'm nowhere close to the last either.  The fact that several months after I purchased a Roomba a couple of my girlfriends announced that they were delighted with their newly acquired Roombas indicates to me that a critical mass of consumer acceptance might have taken place (I admit this is incredibly subjective).

In Spain robotic vacuum cleaners account for 25% of all sales vs. only 8% in the United States?  Do the Spanish just value their siesta time more, or are we as Americans just behind the times. Suffice to say, I believe that the company has major room for expanding its sales here in the States, as well as around the world.

But Wait, There’s More

That said, the Roomba is nowhere close to iRobot's (NASDAQ: IRBT) only line of product.  They also produce underwater robots used in oil exploration, kitchen cleaning mop robots named Ava, supply robots to the Department of Defense among which include those who dispose of IED's in Iraq and Afghanistan, thus saving many of our brave soldiers' lives, and have recently purchased Evolution Robotics for $74 million in cash, which makes the Mint automatic floor cleaning robot, which are expected to add $22 to 24 million in revenues next year. The company is also expanding into a line of health care robots.

Financial Metrics

The company currently trades just south of $18 a share, has a price to earnings ratio of 14, and considering it has zero debt on its balance sheet, after shelling out the cash for the Evolution Robotics purchase, the company will still have approximately $3.50 in net cash per share, which coupled with a strong patent portfolio makes the stock appear very cheap.

So What Gives

So what’s the issue?  Why is a company with tremendous growth potential, with a less than $500 million market valuation, selling so seemingly cheaply?

My recommendation of this stock flies directly in the face of TheStreet.com’s  recent downgrade from buy to hold. Quoting: “Net operating cash flow has significantly decreased to $11.80 million or 52.74% when compared to the same quarter last year. In addition, when comparing the cash generation rate to the industry average, the firm's growth is significantly lower.”

What TheStreet didn’t tell you was the decline in cash flow (and the corresponding drop in price which saw the price decline from $24 to $18 overnight, was mainly due to investors fretting over Department of Defense Cuts in the Obama budget.  In fact, the Defense Department has already cut back on purchases of Warrior Robots from our little company, which actually created layoffs in the company in that department.

This was of course a major source of revenues for iRobot. And of course, they are right.  In the near term profits will drop, and the stock price has as well, which is why we have such a great buying opportunity.

They'll Be Back

But I'm here to tell you that such fears long-term are unfounded.  Because as long as there's a return on investment (ROI) on any product, it behooves businesses, people, and the DoD to buy. 

If a soldier's live is saved, if he doesn't get injured, how much money will this save taxpayers over the long term?  I'm not exactly sure the answer, but I'm almost certain it is greater than the price of the robot. So maybe the Dept of Defense has decided they other short term priorities, but as long as the products represent a good ROI, my bet is that the US Government will be back as a customer, and even if not, the stock is sufficiently cheap with enormous potential for growth in the consumer market to place a bet on its prospects.

Bottom Line

Robots right now are nowhere close to mainstream as they will be in coming years. High production costs, and the relative recent evolution of the required technology will keep costs to consumers high for the time being. Historically though,  we have seen technology build upon itself and related cost reductions across the board. Expect the same thing here with robotics.

iRobot is already bringing robotics into your home, and will continue to advance its technology and offerings. At current prices, with an expanding marketplace, solid balance sheet, and a market cap of less than $500 million, I see tremendous room for growth.

Thoughts? Something I missed, something positive to say? Leave a comment below.


margiecfl has long positions in Google and iRobot. The Motley Fool owns shares of Amazon.com and Google. Motley Fool newsletter services recommend Amazon.com, Google, and iRobot . 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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