The Consumer Discretionary sector has been one of the highest-performing sectors in the market year-to-date; as the broad market has pushed to new all-time highs, so has this sector, increasing about 24% year to date and more than 4% in the last month, as measured by the S&P 500 Consumer Discretionary Sector SPDR ETF (XLY). That performance has certainly been encouraging on a broad sector basis; but as trade tensions persist, there are signs that the effect of tariffs have begun to weigh on profit results for a number of companies in the sector. One of the worries that economists fret about is that the longer tariffs remain in place, those negative effects could persist and push the economy not merely into a slowing growth phase, but even into a period of economic slowdown and contraction that could spur the end of the longest period of economic growth in recorded history in the United States.
iRobot Corp (IRBT) is a stock in the highly varied Household Durables industry that I think is an interesting study of this risk. The stock rallied to an all-time high above $130 in April of this year, but has slumped from that point to its current price around $73. Earlier this week, the company reported its quarterly earnings results, which beat market expectations; but at the same time, they cited tariffs as a primary reason for lowering their forecasts for the quarters ahead. That pushed the stock to drop nearly -$20 overnight to its current level. This is a small-cap stock in the Household Durables industry whose products won’t appeal to every consumer, but they have a strong, building customer base, and while their focus is primarily geared toward consumer robot use, it includes forward-thinking technologies like mapping, navigation, mobility and artificial intelligence. If you’re a geek like me, you can’t really walk into a Best Buy store without at least checking out the section that includes IRBT’s products, which also means that sooner or later you’re likely to buy one of your own.
The real question, of course is whether the stock’s drop to its current price creates a new opportunity for a smart value-oriented investor with a patient, long-term forecast, or whether the risk of continuing price weakness outweighs the long-term benefit. Let’s run the numbers so you can make your own decision.
Fundamental and Value Profile
iRobot Corporation is a consumer robot company, which is engaged in designing and building robots. The Company’s portfolio of solutions features various technologies for the connected home and various concepts in mapping, navigation, mobility and artificial intelligence. The Company sells various products that are designed for use at home. Its consumer products focus on both indoor and outdoor cleaning applications. The Company offers multiple Roomba floor vacuuming robots. Roomba’s design allows it to clean under kick boards, beds and other furniture. It offers the Braava family of automatic floor mopping robots designed for hard surface floors. The Roomba 600 series robots offer a three-stage cleaning system. The iRobot HOME Application helps users to choose cleaning options for their home. Its Mirra Pool Cleaning Robot is used to clean residential pools. The Company’s trademarks include Scooba, ViPR, NorthStar, Create, iAdapt, Aware, Home Base, Looj, Braava, vSLAM and Virtual Wall. IRBT has a current market cap of $2.1 billion.
Earnings and Sales Growth: Over the last twelve months, earnings decreased almost -32.5%, while sales increased nearly 15%. In the last quarter, earnings declined a little over -70%, while revenues rose 9.5%. The company’s margin profile also reflects the negative pattern earnings have shown; over the last twelve months, Net Income was 7.57% of Revenues but narrowed to just 2.77% in the last quarter.
Free Cash Flow: IRBT’s Free Cash Flow is modest, $64.58 million. That translates to Free Cash Flow Yield of 3.15%.
Debt to Equity: IRBT has a debt/equity ratio of .1, which is a very low number. Their balance sheet shows $152.78 million in cash and liquid assets against $59.8 million of long-term debt. Their narrow, declining margin profile means that while they should have no problem servicing their debt right now, they could encounter issues down the road if that pattern doesn’t improve.
Dividend: IRBT does not pay an annual dividend.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for IRBT is $20.66 per share. At the stock’s current price, that translates to a Price/Book Ratio of 3.56. Their historical average is 4.56, which means the stock is undervalue by about 28%, and provides a good reference for the stock’s long-term potential upside, which is at about $94 per share.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: This chart displays the last two years of stock performance for IRBT. Since dropping from its all-time high at nearly $133 in April, the stock had been moving in a narrow consolidation range, with support in the $88 price range until the company released their latest earnings report. That pushed the stock down to about $73.50 overnight, where it has been holding since then. If the stock’s bearish momentum continues, I would expect to see the next significant support level at around $67.50. If, however, the stock picks up a bit of bullish momentum, the overnight gap between the current price and about $88 could provide some short-term opportunity. It’s common to see stocks that form overnight gaps like this one, fill about half the distance of that gap. That could provide some near-term upside to about $80 per share.
Near-term Keys: If the stock can show a rally off of support, and break to about $75, there could be an interesting opportunity to buy the stock or work with call options with an eye on $80 (the midpoint of this week’s overnight gap) as a closing target price. If, however, the current bearish momentum pushes the stock below $73.50, consider shorting the stock or working with put options, with a plan to exit the trade at around $67.50. The value proposition for IRBT is interesting, but I would prefer to see an improvement in Net Income on a quarterly basis before I took the long-term opportunity seriously, given the stock’s current bearish momentum and pace.