Will This Robot Maker Automate Your Profits?

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With more than 5,400 stocks to choose from, the universe of investment possibilities is enormous. You could get tips over the company water cooler or from Internet discussion boards. A better way might be to look for stocks based on what you already know and own.

Motley Fool CAPS helps you focus your energies by providing you with a personalized Stock of the Day. Using its supercomputer, it looks at stocks currently in your active pick list, stocks picked by highly rated players with lists similar to yours, industries in which you currently have active picks, and areas in which you already have an interest.

By pairing up the opinions of some of the top investors in the CAPS community, CAPS provides you with a handful of companies on which to begin your own due diligence and research.

Buy what you know
No doubt based on my interest in the household durables sector, where I had rated GPS specialist Garmin to underperform the market, the CAPS supercomputer thought I also might be interested in something more durable, this time robot maker iRobot (Nasdaq: IRBT  ) . It was one of five Stocks of the Day it offered up for my consideration this week.

Personal robotics are still relatively new, so let's see what the maker of the Roomba vacuum has going for it that might still warrant an investment, even if the supercomputer hasn't yet picked it for you. Just remember, as smart as the CAPS algorithm may be, it's still just an algorithm, so be sure to look before you leap on any of its suggestions.

iRobot Snapshot

Industry Household durables
Sector Consumer discretionary
Market Cap $816 million
Revenues, TTM $460 million
Return on Capital, TTM 11.2%
Dividend & Yield N/A
Cash $176.7 million
Long-Term Debt None
Free Cash Flow, TTM (OCF-CapEx) $52.3 million
Recent Price $25.19
CAPS Rating (out of 5) ****

Sources: Motley Fool CAPS; S&P Capital IQ. TTM = trailing 12 months.

Rise of the robots
According to the Robotic Industries Association, more than 5,500 robotic units were sold in North American in the second quarter at a value of $403 million. That 14% increase in unit growth and 28% increase in dollar value marked the greatest sales period in the industry's history.

While that shows healthy demand, with the economy still shaky, not even the RIA is sure the industry can continue posting such impressive numbers, particularly since the auto industry accounted for two-thirds of those sales while non-auto robot units dropped 8%.

It's not quite the Jetsons
iRobot did better than the industry, though, with its home robot division enjoying 40% growth domestically and 55% growth internationally. That kind of performance belies the consolidated 3% total increase in revenues it reported in the second quarter, largely due to a dramatic fall-off in its defense and security segment, where sales fell 65% from the year-ago period. Yet like the overarching auto industry the RIA worries about because it is so cyclical, defense industry contracts are also notoriously lumpy.

Robotics in the home is gaining in both acceptance and popularity. In addition to the Roomba, iRobot makes floor-washing devices, gutter cleaners, and pool scrubbers. Honda (NYSE: HMC  ) , best known for its cars and motorcycles, is introducing a robotic lawn mower (thank goodness!) that operates very similarly to the Roomba, but will only be available in Europe for the time being. Google (Nasdaq: GOOG  ) is testing a car that drives itself, and both Ford (NYSE: F  ) and General Motors are testing autonomous vehicles.

Smaller companies are also in the game: Nanda Home makes an alarm clock that runs away from you, and Adept Technology makes home and business security robots, as well as devices for a host of industries -- but Microsoft (Nasdaq: MSFT  ) is also looking to enter the field.

An alternate reality
I think where we'll really see iRobot excel is in its new emerging technologies division, which will be based around its AVA platform, a prototype human interface robot standing about five feet high. It will focus on health care, retail, and security by diagnosing your illnesses, leading you around a store to find a product, or protecting your home.

Replicating growth
At 20 times earnings estimates, iRobot doesn't look especially cheap, but when you note that its enterprise value trades at less than 10 times its free cash flow, it takes on a much more attractive quality. Motley Fool CAPS All-Star member starz188 says that while investors need to keep an eye on the declining defense sector, "they're diversified enough (Roomba, Scooba) to make me a long-term buy and hold."

I think iRobot and the industry might find resistance to robotic avatars in the health care field -- will you really trust a robot's diagnosis? -- but I think they'll gain wide acceptance elsewhere. I'm also rating it to outperform the broad indexes on CAPS, but let me know in the comments section below whether you think this stock is an automatic buy.

No buzzkill here
Robotics just might be the future for Microsoft as its Kinect platform provides a technology for others to design from. Now there's a new premium research report on Microsoft  outlining the opportunities facing it -- and the risks you must watch out for! The report also includes a year's worth of updates, so check it out now.

Fool contributor Rich Duprey holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Ford Motor and Microsoft. Motley Fool newsletter services have recommended buying shares of Google, Ford Motor, General Motors, iRobot, and Microsoft. Motley Fool newsletter services have recommended creating a synthetic long position in Ford Motor and a synthetic covered call position in Microsoft. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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Rich Duprey

Rich has been a Fool since 1998 and writing for the site since 2004. After 20 years of patrolling the mean streets of suburbia, he hung up his badge and gun to take up a pen full time.

Having made the streets safe for Truth, Justice and Krispy Kreme donuts, he now patrols the markets looking for companies he can lock up as long-term holdings in a portfolio. So follow me on Facebook and Twitter for the most important industry news in retail and consumer products and other great stories.


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