Would iRobot be a good investment?
Opdateret: aug. 22
iRobot has been on my watchlist for quite some time, and I wanted to have a deeper look into the company. This is my analysis of iRobot and whether it will be a good investment or not.
This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and also briefly go through why the company has meaning to me. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.
Personally I do not own any of iRobot's products. I have often considered buying both a Roomba vacuum cleaner and a Braava floor mopper, as I would rather do other things than vacuuming and mopping. Even though I do not own any of the products myself, I know of people who do, and while they are all very satisfied with the products, I do not have any first hand experience with their products yet.
iRobot is a company that was founded in Delaware in 1990 by three members of MIT's (Massachusetts Institute of Technology) Artificial Intelligence Lab who designed robots for space exploration and military defense. iRobot is most known for their vacuum cleaners called Roomba and their floor moppers called Braava. They are now by far the largest company in the autonomous cleaning devices industry. They have with time developed a brand moat in the industry, however I do not feel like the moat is as strong as in many other of the companies I have analyzed previously, which is something you need to keep in mind before investing in iRobot. Before we dig into the numbers, we will go through the management.
Their CEO is Colin Angle. Besides being the CEO, he is also one of the cofounders, which is something I like, as founders and cofounders are usually more determined to grow the business than their wallets. Colin Angle has an impressing background in technology. Him and his team designed the behavior-controlled rovers for NASA that let to the Sojouner exploring Mars in 1997, and his name is inscribed inside the case of Spirit, which is the Mars exploration rover on display at NASA. His master thesis at MIT produced a six-legged autonomous walking robot that is now at the Smithsonian National Air and Science Museum. His management skills also seems to be great, as he has previously been named CEO of the year by the Mass Technology Leadership Council, was named one of Fortune Small Business Magazine's best bosses and was awarded New England Entrepreneur of the year by Ernst and Young. He is also a member of the board of directors at Striiv, Inc. All of this means that he certainly has a lot of knowledge about the industry, while he also seem to possess important management skills.
We have determined that iRobot has a brand moat. We really do like the management as well. Now let us look into the big five numbers in order to see if iRobot does live up to our requirements for a strong moat. In case you want an explanation about what the big five numbers are, you can have a look at "MY STRATEGY" on the website.
The first number we will look into is the return on investment capital, also known as ROIC. We want to see 10 years of history and we want the numbers to be above 10 % in all of the benchmarks. iRobot shows great numbers in all of the benchmarks. All of them are well above the 10 % requirement and keep decreasing.
The next numbers we will look into are the Sales Growth Rates. As we can see the Sales Growth Rate is well above 10 % in all benchmarks. Ideally we would like to see the numbers increase in every benchmark, which they haven't but it is nothing to be worried about. Nevertheless the numbers meet the requirements in all of the benchmarks.
The next numbers are the EPS Growth Rates. As with all other growth rates we want the numbers to be above 10 % in all benchmarks. The numbers are fantastic in all of the benchmarks. These numbers should make everyone that invest in iRobot excited.
The Equity Growth Rate meet all of our expectations, as all benchmarks are above 10 %. The equity growth is in my opinion the most important growth rate. It is encouraging to see that it has been growing in each benchmark in the last 7 years. Once again iRobot delivers on the numbers.
Finally we look into the Cash Growth Rates. Once again the numbers are fantastic. Way above the requirements on all of the benchmark, and there is nothing bad to say about the cash growth rate.
To shortly summarize the five numbers from iRobot. All of the numbers in all of the benchmarks meet our requirements. There is absolutely nothing bad to say about these numbers. Once you have numbers like these, I like to look into them a bit more in details than only in the benchmarks. And I found that the EPS growth rate in 2019 underwhelmed at -3,1 % and I believed I found some weakness in iRobot. However, I found that the reason for the decrease in EPS growth in 2019 was due to tariffs. More precisely the Section 301 tariffs on List 3 goods from China, which increased tariffs from 10 % to 25 % midway through 2019. As iRobot gets their components from China, it obviously affected their financial performance in 2019. If you look into the financials from 2019, you see that their revenue actually increased 11 % from 2018 to 2019. In order to deal with the increased tariffs on goods from China, iRobot has started manufacturing operations in Malaysia instead, which should have a positive impact on their financials. It means that the numbers for iRobot are fantastic
Another important thing to look into is debt, and we want to see if a business has a reasonable debt that can be paid off within 3 years. We do so by dividing the total long-term debt by current cash flow. I wanted to do the calculations on iRobot as I do with all other companies that I analyze, however it is not possible as iRobot has no debt, which obviously is a very positive thing.
I see a lot of potential in iRobot. If we focus on the global robotic vacuum cleaner market, it was valued at $2.56 billion in 2019 and it is expected to grow at a compound annual growth rate of 17,7 % from 2020 to 2027. iRobot's market share in the robotic vacuum cleaner market was 52% in 2019 (the 2nd largest is Ecovacs with 14%), meaning that iRobot will take a large share of a growing industry. Besides that they are also part of the robotic floor mopping market and they are developing a robotic lawn mower called Terra. Hence, I believe there are plenty of space for iRobot to grow. Colin Angle seems to agree, as he has said the following in an interview with the Consumer Technology Association: "Twenty-eight years in, I feel like we are just getting started on what the opportunity truly is for robots in our lives". iRobot is also using a significant part of their budget on research and development.
As with all other companies there are also some risks. I already mentioned that even though they have a brand moat, it might not be strong enough to keep competitors away. While they still have a huge market share, it has decreased from 63 % in 2014 to 52 % in 2019 as we see more and more competitors in the market. Another risk is the economic impact of the Covid-19 pandemic. We will see some sort economic consequences due to the pandemic and if people have less money, their first priority might not be a robotic vacuum cleaner
All right, we have gone through the numbers, potential and risk regarding iRobot, and now it is time for us to calculate a price for iRobot. In order to calculate price, we will need numbers that I have explained in the "MY STRATEGY" section of the website. I do not want to go through the whole calculation here. I chose to use a EPS of 5, which is a bit lower than the current EPS of 6,16. I chose a Estimated future EPS growth rate of 13 (It is a bit lower than the analysts consensus growth rate of 13,5), Estimated future PE 26 (in this case we multiply our predicted growth rate with two, as this is lower than the historical highest P/E) and we already have the minimum acceptable return rate on 15 %. Doing the calculations by using the formula I described in "MY STRATEGY" we come up with the sticker price (some call it fair value or intrinsic value) of $109,08, and we want to have a margin of safety on 50 % , so we will divide it by 2 meaning that we want to buy iRobot at price of $54,54 (or lower obviously), if we use the Margin of Safety price.
Our second way to calculate a buy price is the TEN CAP price, which is also explained at "MY STRATEGY". In order to do so, we need some numbers from their financials, keep in mind that all numbers are in millions. The operating Cash Flow last year was 232,05. The Capital Expenditures was 31,60. I tried to look through their annual report to see, how much of the capital expenditures were used on maintenance. I wasn't able to find it though, so as a rule of thumb, you expect 70 % of the capital expenditures to be used on maintenance, meaning we will use 22,12 in our further calculations. The Tax Provision was 40,85. We have 28,09 outstanding shares. Hence, the calculation will be like this: (232,05 - 22,12 + 40,85) / 28,09 x 10 = $89,28 in TEN CAP price.
The last calculation is the PAYBACK TIME. I also described in "MY STRATEGY". With the Free Cash Flow Per Share at 5,54 and a growth rate of 13 %, if you want your purchase back in 8 years, the PAYBACK TIME price is $79,86.
I do believe that iRobot is a great company with a great management. Even though they are facing some risks, I see the company as having a great growth potential. I would open a position in iRobot if it gets somewhere between the Ten Cap price and the Payback Time price around $85.
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