With shares of iRobot Corporation (NASDAQ: IRBT ) up 23% so far this year and trading around 45 times last year's earnings, this doesn't look like a particularly cheap stock right now. So why in the world would the robotics specialist announce a significant share repurchase authorization?
That seems to be the question on iRobot investors' minds after the company did just that yesterday evening, unveiling a $50 million authorization allowing it to repurchase shares between May 1, 2014, and April 30, 2015. This morning, its stock jumped by nearly 4% early on, then fell into negative territory by the afternoon.
But before you go kicking sand on iRobot's announcement, I'm happy to go out on a limb to say this buyback authorization makes perfect sense.
Don't be surprised if it goes unused
First, keep in mind we went through this same drill a little over a year ago, when iRobot announced a new $25 million authorization allowing it to repurchase shares between March 28, 2013, and March 27, 2014. Only last time, the stock had just taken a nasty post-earnings dive following iRobot's disappointing Q4 2012 report.
But that's not to say iRobot had a big window of opportunity to make it count; just two weeks before last year's authorization went into effect, iRobot stock jumped more than 10% in a single day after the company raised its first-quarter guidance. In the time between the original announcement and the end of the year, shares had risen nearly 70%.
So, of the $25 million, how much did iRobot use to reduce its share count as the stock rose?
That would be a grand total of -- wait for it -- zero dollars.
You read that right: During iRobot's most recent fourth-quarter conference call two months ago, management confirmed they had not repurchased any shares under that $25 million program. So, barring the unlikely event they spent some of that money between then and now, chances are the entire $25 million went unused.
And while it's tempting to be disappointed as a longtime shareholder myself, I think iRobot management deserves a round of applause for their prudence. After all, why repurchase shares after your stock price has skyrocketed? Sure, iRobot wouldn't have been the first to do so, but such blindly optimistic repurchases simply don't create value for shareholders. Rather, they destroy it.
This doesn't foretell a bad year
On that note, some shareholders might worry this portends bad things for iRobot going forward. After all, this could mean iRobot management expects shares to fall, right?
Not necessarily. I think that's the wrong way to think about this situation. Just as iRobot's stock could easily rise from here if the company continues to outperform -- in which case iRobot likely just wouldn't utilize its new authorization -- I think iRobot management simply wishes to maintain the flexibility to take advantage of any unforeseen market volatility going forward. It if happens, they'll be ready. If it doesn't, then so be it.
At the same time, note that iRobot ended 2013 with $187 million in cash and no debt on its balance sheet and generated $41 million in operating cash flow last year. In short, even if iRobot used the entire $50 million over the course of 2014, it would still leave ample room for the company to continue investing in its business through R&D, supply chain optimization, sales and marketing, and other less tangible, value-creating actions.
In the end, that's why I'm convinced iRobot's buyback makes perfect sense and why I plan to continue to hold my shares for the foreseeable future.
Are you ready to profit from this $14.4 trillion revolution?
iRobot has long maintained a goal of making consumers' lives easier through robotics. This could have incredible implications on the way we live going forward, but it's not the only revolution under way. So where else can investors put their money to work?
Let's face it: Every investor wants to get in on revolutionary ideas before they hit it big. Like buying PC maker Dell in the late 1980s, before the consumer computing boom. Or purchasing stock in e-commerce pioneer Amazon.com in the late 1990s, when it was nothing more than an upstart online bookstore. The problem is, most investors don't understand the key to investing in hyper-growth markets. The real trick is to find a small-cap "pure play" and then watch as it grows in EXPLOSIVE lockstep with its industry. Our expert team of equity analysts has identified one stock that's poised to produce rocket-ship returns with the next $14.4 TRILLION industry. Click here to get the full story in this eye-opening report.