iRobot: Small Cap of the Future

| About: iRobot Corporation (IRBT)
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Automation of the military, labor, and household trends has been one of the most consistent trends of modern society and catalysts for economic growth. With the advancement of modern robotics technology, expect this trend to accelerate. Robots currently have the ability to replace workers in factories, soldiers for scouting the battlefield, and to save you time by doing domestic chores. With the cutting edge technology in this industry, sound financial, and excellent growth prospects, iRobot provides the best opportunity to invest in advancement of robotics.

iRobot (NASDAQ:IRBT) is the most pure play on the growth of robotic technology in modern society. They manufacture robots and innovate to create new robotic solutions for military, and household applications. Examples of their products include the Roomba vacuum cleaner, the Scooba robotic mop on the domestic side and military robots such as Packbot and the iRobot Warrior which specialize in scouting and mine removal. Roomba sales continue to rise, and the company can grow to automate more household chores.

However, the military side of the business has much more upside for growth. With the risk of a decreased defense budget, the US military will use robotic technology to make combat more efficient. The U.S. Navy recently agreed to a $230 million dollar contract to expand its use of robotics in transporting supplies. Robot use can also be expanded to be used in combat and medical situations. Additionally, irobot also produces robots that can clean up natural and man made disasters, including currently sending robots into radioactive areas of Japan. iRobot is also committed to innovation with a 67% increase in research and development spending year over year, outside of subsidies received by government agencies such as DARPA. Also, the growth of the robotics are market is expected to more than double between now and 2025.

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The financials of the company are also sound. iRobot has no debt and a return on investment of 17% versus the 2% industrial average. Earnings have grown at a 54% average pace over the past five years and are expected to continue to grow at over a 24% clip through the next five years. iRobot also has a track record of over achieving earnings estimates.

However, there are concerns in the short and medium term that are having me wait for the right time to buy in. First, its MAC-D and stochastic indicators are trending negative. A relatively high short float of over 6% is also a legitimate concern. In addition to this, the company, despite beating earnings, did not raise its outlook for the year. The company also has low levels of free cash flows per share caused by increased R&D spending. The P/E is high at 36, but when adjusted for growth it turns out a much more reasonable PEG ratio of 1.57. Overall, it may be overpriced in the short term (buy on a pullback to $32.50 per share or bullish turn in technical momentum indicators), the long run growth for iRobot and the robotic industries make me bullish on the stock's prospects.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in IRBT over the next 72 hours.