Introduction:
iRobot Corporation (NASDAQ: IRBT) is a Massachusetts-based
consumer goods company that specializes in the design, construction, and
marketing of robots that perform simple household tasks such as floor
vacuuming, automatic floor mopping, floor scrubbing, pool cleaning, and gutter
cleaning.
They operated through two segments, Home Robots and Defense
and Security Robots, but in April 2016 they sold the Defense and Security section
of their business for 45 million dollars. At the time of the sale, the Defense
and Security operations accounted for approximately 9% of their revenue, while
their Home Robots generated the remaining 91% of revenue.
Methodology:
I performed two different valuations types to determine the
intrinsic and relative value of the stock. First I calculated the intrinsic
price per share using a discounted cash flow model that specifically took into
account the company’s free cash flow.
Additionally, I completed a relative valuation using
fundamental ratios to compare IRBT to seven similar counterparts in either its
industry or sector. I then used the calculated median of each ratio to
determine the strength of IRBT in comparison to its peers.
Application of Methodology Part One (DCF)
See the bottom of this post to view
assumptions made for the following discounted cash flow valuations. To
summarize, I calculated a range of valuations based on variations in the
terminal growth rate and short-term growth rate. I derived the overall one-year
price target by computing the average intrinsic price/share.
Low
Short-term Growth Rate Scenarios
Scenario
One – Terminal Growth Rate 0.5% / Short-term Growth Rate 16%
Price per Share: $48.32
Scenario
Two – Terminal Growth Rate 1.5% / Short-term Growth Rate 16%
Price per Share: $53.63
Scenario
Three – Terminal Growth Rate 2.5% / Short-term Growth Rate 16%
Price per Share: $60.64
Average
Intrinsic Share price: $54.20
Median
Short-term Growth Rate Scenarios
Scenario
One – Terminal Growth Rate 0.5% / Short-term Growth Rate 18%
Price per Share: $52.28
Scenario
Two – Terminal Growth Rate 1.5% / Short-term Growth Rate 18%
Price per Share: $58.07
Scenario
Three – Terminal Growth Rate 2.5% / Short-term Growth Rate 18%
Price per Share: $65.70
Average
Intrinsic Share price: $58.68
High
Short-term Growth Rate Scenarios
Scenario
One – Terminal Growth Rate 0.5% / Short-term Growth Rate 18.5%
Price per Share: $53.31
Scenario
Two – Terminal Growth Rate 1.5% / Short-term Growth Rate 18.5%
Price per Share: $59.22
Scenario
Three – Terminal Growth Rate 2.5% / Short-term Growth Rate 18.5%
Price per Share: $67.02
Average
Intrinsic Share price: $59.85
Price Target: $57.58
Current
Price per Share: $52.02 (as of close 11/14/2016)
Application of Methodology Part Two (Relative)
I used the following companies to produce a relative
valuation for IRBT:
- Helen of Troy Limited (HELE)
- Whirlpool Corporation (WHR)
- NACCO Industries, Inc. (NC)
- HRG Group, Inc. (HRG)
- SodaStream International Ltd. (SODA)
- Spectrum Brands Holdings, Inc. (SPB)
- Cisco Systems, Inc. (CSCO)
See the following for a side-by-side
comparison of key metrics:
Ticker
|
Debt/Equity (mrq)
|
Current Ratio (mrq)
|
P/E
|
Beta
|
HELE
|
55.31
|
1.96
|
23.45
|
0.72
|
WHR
|
90.31
|
0.99
|
14.23
|
1.80
|
NC
|
69.94
|
1.67
|
26.24
|
0.20
|
HRG
|
352.14
|
1.16
|
-8.80
|
1.60
|
SODA
|
6.83
|
2.92
|
37.16
|
1.16
|
SPB
|
214.92
|
2.03
|
26.08
|
0.95
|
CSCO
|
45.05
|
3.16
|
14.88
|
1.26
|
IRBT
|
N/A*
|
3.80
|
31.41
|
1.10
|
Peer Median
|
69.94
|
1.96
|
23.45
|
1.16
|
Best
|
6.83
|
3.80
|
14.23
|
0.20
|
IRBT metrics that are highlighted in green are better than
the industry median. The IRBT metric that is highlighted in red is worse than the
industry median. IRBT doesn’t have any disclosed long-term debt, so an accurate
long-term debt to equity ratio cannot be calculated.
While IRBT’s P/E ratio is high relative to the calculated
industry median, it is justified considering their average projected annual growth
for the next five years and their leading market share.
Final Thoughts:
When formulating my recommendation, I considered the
following factors:
- According to my discounted cash flow valuation, IRBT is undervalued.
- IRBT is favorable relative to the industry median for two out of the three applicable relative valuation metrics.
- Analysts estimate IRBT will outpace average industry growth by 5.4% next year.
- Analysts estimate IRBT will outpace average annualized industry growth by 8% for the next five years.
- The aforementioned growth potential justifies their relatively high P/E ratio.
- They are the market leader for robotic vacuum cleaners.
- Their penetration of the Chinese robotic vacuum market through e-commerce has potential to drive significant future growth.
- iRobot has diversified their revenue stream through the addition of non-floor care robots.
Recommendation
Given the factors mentioned above, I recommend buying this stock.
APPENDIX
**Discounted Cash Flow Model Assumptions**
Variable
growth rates are bolded
Price/Earnings: 31.41
Earnings before interest and
taxes: $62,971,000
Depreciation (2015):
$15,090,000
Capital Expenditures (2015): $9,372,000
Beta: 1.1 (sourced from Yahoo
Finance)
Terminal Growth Rate: 0.5% / 1.5% / 2.5%
Market Value of Equity: $417,411,000
Long-term Debt: $7,706,000
Total Debt: $104,332,000
Book Value Assets: $521,743,000
Shares Outstanding: 27,180,000
Interest Expense: $0.00
Change in Working Capital: -
$16,905,000
Short-term Growth Rate: 16.00% / 18.00% / 18.50%
Tax Rate: 35%
**Risk Free Rate: 0%
Market Risk Premium: 8%
Cost of Equity: 8.80%
Weighted-Average Cost of
Capital: 7.04%
**Risk free rate is assumed to be zero because the current
level of interest rates is effectively zero in its ability to influence the DCF
model output.
Holdings Disclosure: Neither Trenton Barnard nor Suffolk University Student-run Investment Fund hold a position in IRBT at the time of this publishing.
Trenton Barnard is not a financial advisor nor does he hold any licenses related to investments. The contents of the Imperium Investment Management blog ("Blog"), in whole or in part, are for information and illustrative purposes only and do not purport to show actual results. All contents of this Blog are not, and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action. Opinions expressed herein are current opinions as of the date appearing in this material only and are subject to change without notice. Reasonable people may disagree about the opinions expressed herein. In the event any of the assumptions used herein do not prove to be true, results are likely to vary substantially. All investments entail risks. There is no guarantee that investment strategies will achieve the desired results under all market conditions and each investor should evaluate its ability to invest for a long term especially during periods of a market downturn. No representation is being made that any strategy will or is likely to achieve profits, losses, or results similar to those discussed, if any. No part of this Blog may be reproduced in any manner, in whole or in part, without giving due attribution to Trenton Barnard and Imperium Investment Management. No part of this Blog can be used for monetary gain without prior written consent from Trenton Barnard and Imperium Investment Management. This information is provided with the understanding that with respect to the material provided herein, that you will make your own independent decision with respect to any course of action in connection herewith and as to whether such course of action is appropriate or proper based on your own judgment, and that you are capable of understanding and assessing the merits of a course of action. Trenton Barnard nor Imperium Investment Management do not purport to and do not, in any fashion, provide tax, accounting, actuarial, recordkeeping, legal, broker/dealer or any related services. You may not rely on the statements contained herein. Trenton Barnard nor Imperium Investment Management shall not have any liability for any damages of any kind whatsoever relating to this material. You should consult your advisors with respect to these areas. By reading any contents of the Blog, you acknowledge, understand and accept the foregoing.
