A Growth Stock With Staying Power

Updated

Shares of iRobot (NAS: IRBT) have taken a beating lately, crashing more than 21% this week following the company's quarterly earnings report. Meanwhile, the stock is down nearly 25% year to date. But before we kick this futuristic company to the curb, let's take a look at what's really going on. You never know, we just might uncover a value play.

On the defensive
Budget cuts in defense spending this year have been particularly challenging for the robotics maker, as sales of its defense bots continue to stall. Luckily, the company's popular floor-vacuuming robot, the Roomba, has picked up the slack. In fact, sales of the Roomba now represent about 15% of the global vacuum industry.

The company reported third-quarter earnings that beat analysts' expectations. However, management followed up the earnings report with dismal guidance for its current quarter as the company works on restructuring its defense business. As a result, iRobot now forecasts a fourth-quarter loss of between $0.33 and $0.39 per share. That's quite a departure from the $0.20 profit, which analysts' had previously predicted for the company's current quarter.


Nevertheless, iRobot's plan to change the direction of the company to focus on its more profitable home robot segment is a smart move that will likely pay off down the road.

Technically sound
The company isn't wasting any time. The planned shift away from the security business and toward home bots is already under way, as iRobot decided to close one of its defense factories in Durham, N.C., earlier this week. But it's not all bad news for iRobot shareholders. Over the past four years, sales in iRobot's consumer segment have increased 53%, while net income grew 350% in that time.

Last year, home robots accounted for 60% of iRobot's total revenue. That's important because as this segment grows, the company's overall profitability should, too. Its army of home bots boasts an impressive product lineup that includes the iRobot Looj 330 for gutter cleaning, iRobot Scooba 390 for washing the floor, and the iRobot Verro for cleaning the pool.

Best of all, the company is finding growth overseas by selling these products in markets like Europe, China, and Latin America. In fact, more than 70% of iRobot's home-cleaning devices are available abroad. Not yet impressed? Not to worry, home bots are just the beginning. iRobot is also making meaningful inroads into other industries, including retail and health care.

Ava at your service
Earlier this year, iRobot pulled the curtain back on a new mobile robotics platform it calls Ava. The portable robot is the result of a joint venture between iRobot and InTouch Health, which iRobot made a $6 million investment in at the start of the year.

Because Ava's interface consists of an iPad, users can communicate remotely. For example, you can hold virtual meetings with work colleagues without having to travel to another office location. The platforms bring a variety of other applications to market as well, such as elder care, education, factory inspection, remote monitoring, and mobile checkout solutions for retail stores.

Source: iRobot.

With so many possible uses for this technology, iRobot's new emerging technologies division could be another revenue channel for the company in the future. Additionally, smart partnerships with leading tech companies such as Texas Instruments (NAS: TXN) also bode well for iRobot. The two teamed up earlier this year to develop robots that will run on Texas Instruments' OMAP mobile processors. The company's OMAP platform helps the bots efficiently process tasks without draining the machine's battery power.

The future
Strategic partnerships like this improve the quality of iRobot's products, which in turn should help the technology gain traction in new sectors like health care. Automatons in general are already being used across industries to help make businesses more resourceful. Remember Amazon's (NAS: AMZN) $775 million purchase of Kiva Systems? Today, the Kiva warehouse bots are helping Amazon fulfill orders faster and deliver shipments sooner.

Even Foxconn, the company that runs Apple's manufacturing factories in China, is planning to supplement its work force with more than a million robot installations over the next few years, according to The New York Times. It's simple: An increasing number of businesses are using robots to perform tasks more quickly. If iRobot plays its cards right, it could benefit greatly from its first-mover advantage in the consumer-robotics space.

Final thoughts
Robots are the future, and I see iRobot sticking around for years to come. With more than 100 U.S. patents to its name, iRobot has the intellectual property backing to protect its lead against new competitors in the sector. Near-term challenges in defense spending may have put a dent in the stock, but the longer-term view looks positive. Shares are currently trading just above $18 apiece, with a reasonable P/E of 19. Another upside is the fact that iRobot has zero debt on its balance sheet and a four-star CAPS rating.

iRobot looks to have a promising future in store. Although, there's no denying that the company faces many challenges in the year ahead as it refocuses the business. Nevertheless, I believe iRobot's proven ability to innovate will help it achieve greater success in the years to come.

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The article A Growth Stock With Staying Power originally appeared on Fool.com.

Fool contributor Tamara Rutter owns shares of Apple and Amazon.com. The Motley Fool owns shares of Apple and Amazon.com. Motley Fool newsletter services recommend Apple, Amazon.com, 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.

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