Automation and the growth of robotics have become two of the dominant trends of this decade. iRobot (NASDAQ:IRBT) is one of the world leading companies that solely does business in the industry. Since I wrote about the company last year, the fundamentals of the company have improved. Revenues were up 28% in the last quarter alone. Due to the growth in the robotics industry and its position as a leader in making consumer robots, high growth is sustainable, with earnings expected to grow at 22.5% per year over the next five years. I still remain bullish on iRobot because of its edge in innovation, the growth of the robotics business, and its attractive valuation.
Company Information:
iRobot (IRBT) is the most pure play on the growth of robotic technology among publicly traded companies. 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.
On the domestic side, Roomba sales continue to rise, and the company can grow to automate more household chores. In the near future, iRobot will be releasing a lawnmower version of the Roomba, which will automate a large portion of gardening labor. For the mean time, iRobot has produced consumer bots that can mop floors, clean and filter swimming pools, and clean pipes.
Through its military operations, iRobot has sold over 3,500 units that have various roles in reconnaissance and industrial activities. Its best selling military robot, the PackBot, is used to enter harmful environments for functions such as mine removal, radioactivity testing, and searching through debris. Other military robots include the extraterrestrial explorer, Genghis, the ocean exploring Seaglider, and the Negotiator surveillance bot. Due to higher margins and the need for national defense to grow more efficient, the military sector is expected to have more growth than the consumer business.
Growth Drivers and Macroeconomic Influences:
· Corporate Automation: By using iRobot's cleaning products, companies can generate savings through buying consumer robots and reducing its janitorial workforce. However, iRobot can most benefit from automation is by expanding is through developing new civilian robots that can automate other types of repetitive work done by humans outside of cleaning.
· Drive to Efficiency in the Armed Forces: In a post Iraq War world, major defense cuts will be occurring. Robotics technology improves the efficiency of the military through saving both money and human lives. Using scout robots in addition to human forces reduces the number of troops needed at a given location and reduces the damage caused by enemy ambushes and explosives.
· Strong Growth in Demand of Robots: Robotics in emerging industry in a way that resembles computers in the 1980's. The industry is expected to have a compounded annual growth rate of 6.7% between now and 2016 while the rest of the economy is expected to grow at 2-3%. The causes of this growth are the massive technological improvements and innovations that have occurred in the industry over the past five years. With 690 major robotics patents issued in the US since 2009, expect the rate of innovation to increase gradually. Due to these innovations, robotics is expanding to new niches beyond its traditional outlets of auto manufacturing, entertainment, and toys, into aerospace, domestic labor, military, medicine, and many other industries.
· Strong Track Record of Innovation and Product Development: Since, it is a relatively new industry, robotics has medium to high threats of competition. However, iRobot's strengths are within its arsenal of patents and workforce of top robotics scientists has given the company a competitive edge in product development. They have also acquired the commercial rights to major patents from both governments and major universities to drive organic growth and attract top engineering talent.
Financial Highlights and Valuation:
In addition to its strong growth prospects, iRobot is also strong financially and trading a cheap valuation. Based on comparable analysis, IRBT seems expensive with a forward of P/E ratio of 20. However, when factoring in earnings growth, the stock is trading cheaply with just a 0.9 PEG ratio. On a discounted cash flows basis, iRobot is also underpriced. As seen in the matrix below, iRobot is trading at a discount near the lower end of the valuation index. The fact that iRobot has no debt and has a strong return on investment of capital of 18% is other notable positive signs of the company's financial condition.
Discount Rate | |||
CV Growth Rate | 10% | 11% | 12% |
2% | $38.05 | $33.45 | $29.78 |
3% | $42.49 | $36.78 | $32.35 |
4% | $48.41 | $41.06 | $35.57 |
Risk Factors:
Risks that can derail the success of iRobot include its reliance of government spending. The US government through various branches of the military is responsible for 38.4% of the company's revenues. I think that defense savings will be through efficiency gains from the increased use of robots, but politics can stir these cuts in another way. Robotics is also an emerging industry with quick rates of obsolescence. Quick changes in consumer tastes or the inability of iRobot to keep its product line up to date with current technology can make the price of its stock volatile and earnings variable.
Conclusion and Recommendation:
Overall, I am strongly bullish on iRobot due to its leadership position in the emerging industry of robotics, strong returns on investment, and increasing macroeconomic pressures that are pushing efficiency via automation. Unlike companies in other dynamic growth industries such as cloud computing, iRobot trades at a reasonable valuation and yet has nearly the amount of upside.
Footnote:
DCF model used assumptions of a 22.5% annual growth rate for the first five years and continuing value growth rate of 3% and a discount rate of 11%.
Disclosure: I am long IRBT.
