Deal Costs To Hold Down iRobot

| About: iRobot Corporation (IRBT)

On Monday, iRobot (NASDAQ:IRBT) announced a deal to purchase Evolution Robotics, Inc. for $74M. The company looks for this deal to expand iRobot's technology leadership through a combination of intellectual property, engineering talent and new products.

iRobot has been a leader in delivering robotic technology-based solutions for both consumer and defense sectors. Evolution brings the Mint product line that automatically dusts and damp mops hard surface floors using popular cleaning cloths.

The stock is trading down again on Wednesday as investors fret over the short-term earnings hit instead of the long-term benefits of the new products and technology.

Deal Highlights

The company reported the following highlights for the deal, expected to close during Q4:

  • Revenue of $4-6M in Q4 2012 and $22-24M in 2013.
  • Cash purchase price is 3.0x 2013 expected revenue with impact of federal net operating losses (NOLs), and 3.2x 2013 expected revenue without impact of NOLs.
  • Acquisition expected to be accretive in Q4 2013, excluding non-cash charges, one-time charges and integration costs.
  • Estimated Adjusted EPS impact of acquisition of ($0.09)-($0.13) in Q4 2012 and ($0.06)-($0.10) in 2013.
  • 31 U.S. patents and 24 pending along with 15 international patents and 18 pending.

The company got a decent price for Evolution considering the revenue multiple, but the dilutive nature of the deal will hurt the stock price. The rather large earnings hit in Q4 will undoubtedly cause investors to take pause.

Outside of the existing Mint product line and revenue base, Evolution has a solid patent base, especially with the Visual Simultaneous Localization and Mapping (VSLM) technology. This technology provides the most compelling methodology for low-cost navigation for robots of all scales.

Stock Valuation

The stock has seen considerable weakness since the first half of 2011. Defense spending has slowed and earnings are expected to drop to $0.99 in 2012 from $1.44 last year.

The Home Robots sector has actually seen substantial growth. The issue remains that the Defense & Security sector saw revenue plunge during Q2 from $44M last year to just $15M this year. As this revenue base stabilizes, the company will return to strong growth.


The company is making a strong move to solidify leadership in the home robotics products. Unfortunately the dilutive nature of the deal will hold down the stock during the integration period.

Heading into 2013, iRobot could be a stock of the year candidate. By the second quarter, the deal will begin to have minimal impacts on earnings. Also, the company will be able to improve margins by using economies of scale for the combined companies. Combine that with potential stability in the defense sector and the company could be set up for the next growth phase.

The stock provides no short-term catalyst for buying right now. Once the weak Q4 numbers are reported early in 2013, investors should be ready to pounce if other investors overlook the long-term fundamentals for short-term costs.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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