iRobot – A great company undervalued by 43%.

by krisolch

Current price: $74.32
Estimated price: $128.98
Margin of safety: 43%

Background

iRobot is a US-based consumer robot company. It designs and builds robots that assist consumers with the solutions for the activities to be carried both inside and outside of the home.

It derives the nearly all of it’s revenue from it’s in house cleaning robots. iRobot price range for it’s robots are between $250 to $1000+. The cheapest robots give a simplistic cleaning such as just bouncing around the room multiple times to clean whereas the most expensive robots have AI to detect and smart map your room/house and efficiently clean.

The big selling points of this top tier robot range is the auto emptying bin functionality that has made these robots almost completely autonomous without much human interaction needed. This high tier product range is where iRobot really shines compared to it’s competitors.

Competitors

iRobot’s biggest risk in my opinion is it’s competitors.

There are already quite a few such as Shark, Ecovacs, Roborock, Neato, iLife, and eufy. As autonomous vacuum cleaners become more popular (and they will) we can expect more competitors to enter this space as well potentially causing margins to be pushed down. Dyson, Bissell, Hoover, Samsung, LG and Panasonic are the traditional heavyweights and are also entering this space. Dyson especially has a history of innovation and could be a future threat.

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While iRobot has lost 12% market share since 2016 the overall market is significantly bigger, especially for the upper end product mix.

This is great news for iRobot as their products have the most added value in the upper range of this mix with features such as:- Auto emptying into bins- Smart AI pathfinding- Efficient charging of it’s robots- Deep clean capability

The upper end of it’s products have great reviews online. This youtube video explains the differences between the competitors very well and rates iRobot the best in the cheapest and most expensive categories for 2020: www.youtube.com/watch?v=bYjlDwY9wPo

NumbersOpearing margin: 11%No debt.PEG Ratio: 0.78.ROIC vs WACC 22% to 10.11%

iRobot has some really great numbers relative to it’s peers. It’s operating margins especially are indictive of a big MOAT and consumer loyalty.

DCF

I used Aswath Damoradan’s spreadsheet for this. Here are the inputs:

18% CAGR was chosen for years 2-5. Considering the rapidly expanding autonomous vacuum market and now COVID-19 has accelerated this very rapidly due to more people spending time at home therefore they are spending more on household items.

The recent revenue growths of 40% in the last quarter are due to the full lockdowns people have had. I expect this to drop in the following years to 18% on average.

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10% EBIT Margin was chosen for year 10. COVID-19 has had a big impact so far this quarter on margins due to the huge demand. This will level off though.

iRobot has a loyal product base and as they have shifted more towards the high end products I expect them to acheive margins of around 10% in year 10.

3 years was chosen for the margins to converge. This is because the short term spike from covid should level off.

2.5 sales to cap ratio was chosen. COVID-19 has stalled the companies plans to transition away from China to other parts of Asia, including Malaysia to 2021. This transitioning is happening due to the tarrifs between China & the U.S. This should cause a short term dip in sales to capital ratio in 2021 due to having to reinvest heavily to move it’s operations out of China.

 

Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence or consult your financial professional before making any investment decision.

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