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Bear of the Day: iRobot (IRBT)

Benjamin Rains

Shares of iRobot (IRBT) have tumbled 40% in the last six months even as its industry and the S&P 500 jumped 12%. The drop came after the robotic vacuum maker narrowed its earnings and revenue outlook as the U.S.-China trade war takes its toll.

What’s Going On?

The firm’s Roomba robotic vacuums have driven sales for years. Today, iRobot’s portfolio includes multiple vacuum models, its Braava Robot mops, and its soon-to-be-launched Terra lawn mower. Another product that could prove to be a hit is the Root, which is a robotic device designed to help children learn the fundamentals of computer coding.

iRobot revenues have climbed for years, including 9% growth in the third quarter, which was driven by 25% international expansion. Despite the overall strength, the company’s U.S. sales slipped 7% last quarter and its gross margin dipped to 47.6% during the first nine months of fiscal 2019, down from 52.1% in the prior-year period.  

The Bedford, Massachusetts-based company has been adversely impacted by the U.S. and China trade war. The firm has tried to move production of some of its “more easy to build products” outside of China to help counteract tariffs. iRobot executives have said that these moves would help it create better long-term supply chain flexibility.

Despite its efforts, iRobot narrowed its fiscal 2019 outlook for both its top and bottom-line expansion. The company lowered the high-end of its sales guidance to $1.21 billion, down from $1.25 billion. Meanwhile, its new EPS outlook came in at the $2.60 to $2.80 range, compared to its previous $2.40 through $3.15.

Plus, iRobot lowered the high-end of its operating income guidance from $100 million to $80 million. Clearly, iRobot’s outlook is much less optimistic but management remains confident. “Despite the severity of U.S. tariffs on robotic vacuum cleaners, and the direct and indirect disruptions they are having on U.S. category growth, we remain committed to delivering exceptional value to consumers and are mobilizing accordingly,” CEO Colin Angle said in prepared Q3 remarks.

 

 

 

 

Other Fundamentals

Investors can see in the chart that IRBT stock is up 70% in the last five years. But the last several years have been more volatile and shares are down 39% during the past two years. More recently, iRobot stock is down 38% in the past year and 40% in the last six months, as we mentioned at the top.

IRBT stock is currently trading at around $55 a share, after trading near $130 per share in April 2019. With this in mind, iRobot shares have surged 14% since January 6, after they bounced up off their 50-day moving average. This might attract some investors but it seems others might want to see further signs of a comeback before trying to buy IRBT on the dip.   

In terms of valuation, iRobot holds a “D” grade for Value in our Style Scores system and is trading at 55.2X forward 12-months Zacks earnings estimates. This marks a significant premium compared to its industry’s 21X average and its own five-year median of 26.4X. IRBT’s forward sales picture does look far better. 

Outlook

The company’s Q4 fiscal 2019 revenue is projected to climb 7.7%, based on our current Zacks estimates. This growth is expected to help FY19 sales jump by 10% to $1.20 billion, with its 2020 figure projected to climb another 9% to reach $1.31 billion.

Despite the expected continued top-line expansion, iRobot’s adjusted fourth quarter earnings are projected to tumble 50% to $0.42 a share. On top of that, its fiscal 2019 EPS figure is projected to fall 49%. Then its adjusted full-year fiscal 2020 sales figure is expected to sink another 65% below our 2019 estimate.

 

 

 

 

Bottom Line

The chart helps us see just how much worse iRobot’s earnings outlook has turned, with its Q4 estimate down from $0.82 to $0.42 a share and its 2020 figure down from $2.35 to $0.93. This negative earnings estimate revision activity helps IRBT earn a Zacks Rank #5 (Strong Sell) right now.

The stock also holds “F” grades for Growth and Momentum and its Industrial Automation and Robotics industry rests in the bottom 6% of our more than 250 Zacks industries.

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