Is iRobot Corporation Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does iRobot Corporation (NASDAQ: IRBT  ) fit the bill? Let's look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell iRobot's story, and we'll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's look at iRobot's key statistics:

IRBT Total Return Price Chart

IRBT Total Return Price data by YCharts

Passing Criteria

Three-Year* Change

Grade

Revenue growth > 30%

20.2%

Fail

Improving profit margin

(23.8%)

Fail

Free cash flow growth > Net income growth

10.3% vs. (8.4%)

Pass

Improving EPS

(17.3%)

Fail

Stock growth (+ 15%) < EPS growth

(3.6%) vs. (17.3%)

Fail

Source: YCharts.
*Period begins at end of Q1 2011.

IRBT Return on Equity (TTM) Chart

IRBT Return on Equity (TTM) data by YCharts

Passing Criteria

3-Year* Change

Grade

Improving return on equity

(53.1%)

Fail

Declining debt to equity

No Debt

Pass

Source: YCharts.
*Period begins at end of Q1 2011.

How we got here and where we're going
iRobot's performance has deteriorated since we first examined it last year, as the robot manufacturer earned only two out of seven possible passing grades in its second assessment, down from six of seven in 2013. The company has struggled to grow its revenue over the past few years, which has weighed down its bottom line and resulted in several failing grades. Will iRobot be able to turn these sliding metrics around and rebound by next year? Let's dig a little deeper to find out.

Last month, iRobot delivered better-than-expected revenue and earnings per share in its first quarter, thanks to new product launches including the Roomba 880 and Scooba 450 devices, but also thanks to a one-time tax benefit. However, the company has nonetheless endured a steep 37% decline in net income despite producing 8% year-over-year revenue growth. iRobot's full-year earnings guidance also left shareholders red-faced, as they were looking out for higher growth than what was offered.

Foolish writer Sean Williams points out that iRobot is highly exposed to consumers' ever-changing buying habits and shifts in government spending, and the latter issue has been an ongoing problem, as the company has suffered defense budget cuts that have shifted spending to more airborne robotics platforms over the past several years. Despite this weakness, research firm Needham maintained its buy rating on iRobot, citing its innovative capabilities to develop blockbuster products -- but the company needs to bring them quickly to market to maintain its edge with consumers. iRobot also recently authorized a $50 million share repurchase program, which should help convince shareholders that its value proposition remains strong.

Fool technology specialist Steve Symington notes that iRobot now plans to launch a new generation of self-navigating automatons using a combination of its patented "Visual Simultaneous Location and Mapping," or vSLAM, technology and inexpensive high-definition cameras to create accurate maps of surrounding areas. The company's new Ava and RP-VITA robotics platforms are also expected to gain a foothold in the health care and enterprise markets, which could be particularly lucrative as telemedicine becomes a more popular option.

Going-forward, iRobot's cheaper Braava floor-sweeping robots should drive strong growth in both China and in much of the rest of the Eastern Hemisphere (particularly in Europe and the Middle East). The company's also released a new brushless Roomba 870 to domestic and international consumers through its website. iRobot will also beef up both advertising and research spending to promote these new home robots while simultaneously improving on its Ava and RP-VITA telepresence robots. This strategy may put more pressure on iRobot's operating margins in the upcoming quarters, but if executed correctly it should pay dividends over the long run.

Putting the pieces together
Today, iRobot has few of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

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