iRobot Beyond the Roomba, Full of Surprises
Nihar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It is old news to many, but I was so surprised that iRobot (NASDAQ: IRBT) does far more than making a vacuum cleaning robot. I knew about the floor cleaning one and even the pool cleaning one seems normal. What I did not know was that it created products with both military and commercial uses. Drones and underwater robots are just some of the items in its bag of tricks, though in actuality there is one underwater robot not counting the pool cleaner. I was amused to learn that what I knew about the company was the tip of the iceberg. The home appliance aspect is the biggest part of the business, but I think defense will play an important part in the future.
Robots are the future, and not in a action movie kind of way. You can already see hints of it with Google's (NASDAQ: GOOG) work involving self-driving cars. I cannot wait for those to actually be self-driving. Self-driving cars have to get to the point where you can take a nap on the way to your destination. If Google can manage that, then it will start a new era of personal transportation. I see Google jumping into the digital road concept too, but that is just something I am inferring from the foray into automated driving. It would make sense for Google to be part of the push to network roads, cars, phones, and everything else.
The share price for iRobot has had a rough year. Early on there was a big move downward, and another downward move in October. The damage is not extremely extensive since the stock has not been moving in solely one direction. The reason the stock took a tumble was the company announced that it expected an EPS loss of $0.08. However, the company surprised the market with a positive EPS of $0.02. The market did not react to this with the same intensity that it reacted to the moot news of a loss. It does create an opportunity, though the company expects a loss for Q4 because of a recent acquisition, which is fine as long as the acquisition creates more value down the line.
I decided to look at iRobot because I was interested in the military and commercial aspects. Unfortunately the company only has one underwater robot. Also, government contracts take a while, but they tend to be large when they do come down so persistence is important.
The growth of the commercial and defense segments is further down the line, but the company seems to be in a solid position. It amazes me that the company has no debt. I would just expect a company that makes a product like the Roomba or other robots to have more in the way of capital expenditures, or R&D spending. The company is profitable, and the news earlier in the year has created a nice opening. That is not to suggest the company is undervalued. The PE suggests to me that it is fairly valued for the gloomy times we find ourselves in. It is at 16.10 right now, but it has been higher in the past. Social media stocks have shown me that aggressive multiples for so-called growth stocks can be misguided if the economy takes a turn for the worse.
Going back to iRobot's future in the defense industry. Budgetary limitations will help companies like iRobot. Drones have numerous advantages over manned vehicles. Particularly as weapons of destruction or reconnaissance. Basically, spotting stuff or blowing it up. The possibility of maintaining a level of capability while lowering costs leads me to believe that defense cutbacks will actually benefit a company like iRobot. It has a limited array of products, but iRobot is an innovator. While it is not a storied member of the military-industrial complex, it does have the ability to carve a place for itself in the industry.
Lockheed Martin (NYSE: LMT) makes a lot of manned planes. Now I am not sure that the budgetary tightening will do serious harm to the company, but it is a concern. Lots of military technology will be based around drones in the future. I am not saying that the orders for manned planes will stop coming in, but they might be diminished. Lockheed is no stranger to drones, but the point is that the majority of their business seems to be more conventional. A smaller company like iRobot has something to grow into and focus on, while Lockheed might fill losses from one division with gains in another. That is why going for smaller companies, or at least the underdog can be lucrative
Drones can be smaller for the same punch. For example, they might be able to deliver the same firepower of an aircraft, but since there is no pilot a bunch of systems can be taken out and space saved. Drones can be lighter, smaller, and cheaper especially if you take out the human cost in risk and lives. Taking men out of the line of fire is the best thing, and saves both lives and money.
This is a field of expansion for iRobot, but it has substantial potential. United States military spending is over half a trillion dollars a year, and that does not incorporate local law enforcement. There is also a market overseas to allies and neutral nations. Defense is major business. If iRobot can even grab a piece of the company it will be pulling in revenue in the billions instead of the hundred millions. The fundamentals of the company appear strong. The consumer products section is doing well and will keep the company growing. Management does not seem to be needlessly aggressive in trying to become a big defense contractor, which is a good decision in these uncertain times. iRobot is probably a good addition to any portfolio, especially at current levels. It is however a small cap growth stock so it should be treated as more speculative than buying Lockheed Martin. It is consistently profitable though so it is not a brand new company with no track record.
TheArchivist has no positions in the stocks mentioned above. The Motley Fool owns shares of Google and Lockheed Martin. Motley Fool newsletter services recommend 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!