Has iRobot Become the Perfect Stock?

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Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if iRobot (NAS: IRBT) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at iRobot.

Factor

What We Want to See

Actual

Pass or Fail?

Growth5-Year Annual Revenue Growth > 15%19.2%Pass
 1-Year Revenue Growth > 12%10.8%Fail
MarginsGross Margin > 35%40%Pass
 Net Margin > 15%7.3%Fail
Balance SheetDebt to Equity < 50%0%Pass
 Current Ratio > 1.33.62Pass
OpportunitiesReturn on Equity > 15%15.2%Pass
ValuationNormalized P/E < 2020.62Fail
DividendsCurrent Yield > 2%0%Fail
 5-Year Dividend Growth > 10%0%Fail
    
 Total Score 5 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at iRobot last year, the company has dropped a point. Slowing revenue growth is to blame for the loss, and it has certainly played a big role in the stock's plunge of more than 45% in the past year.

iRobot has a fascinating combination of businesses. Its Roomba vacuum automatically takes care of your carpets, and its new Scooba makes your floors sparkling clean. But its defense business builds robots that can do much more heavy-duty cleanup, disarming explosive devices and removing radioactive debris. Progress Energy, since taken over by Duke Energy (NYS: DUK) , ordered some of the company's robots to work in one of its nuclear plants.

But because defense plays a big role in the company's revenue, with both direct revenue from defense contracts as well as work as a subcontractor to Boeing (NYS: BA) and other contractors, iRobot has been vulnerable to budget cuts. With a falling defense backlog, the company's future is becoming more uncertain.

Still, iRobot is nearing the point at which defense cuts wouldn't have as huge an impact. With just a third of iRobot's revenue coming from defense contracts, the company certainly has less exposure than Lockheed Martin (NYS: LMT) and Northrop Grumman (NYS: NOC) , each of which gets more than 80% of revenue from defense.

For iRobot to improve, it needs to keep diversifying its product line to avoid becoming too dependent on any one area, particularly defense. If it can succeed in making its robots more mainstream, then iRobot might not have to wait long to start approaching perfection.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate the best investments from the rest.

iRobot isn't perfect, but we've got some other ideas for you to take a look at. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

Click hereto add iRobot to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

The article Has iRobot Become the Perfect Stock? originally appeared on Fool.com.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Lockheed Martin and Northrop Grumman. Motley Fool newsletter services have recommended buying shares of iRobot. 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 Fool has a disclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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