This morning, the Minneapolis-based investment banker announced it is upgrading iRobot stock to buy and assigning the $53 stock a new $65 price target. If Dougherty is right about that, it implies a potential 22% profit for new investors in iRobot stock. (But sorry -- no dividend. iRobot doesn't pay a dividend.)
Is Dougherty right about iRobot though? Here are three things you need to know.
1. iRobot is "an accelerating growth company"
Dougherty sees iRobot stock as ideal for growth-oriented investors, calling the company "an accelerating growth" story, and praising the company's "increased global market penetration ... in the U.S., Japan and China."
The stock is not cheap, but at 33 times earnings, Dougherty believes it is cheap enough to provide market-beating returns over the next year or so -- if iRobot can grow fast enough.
2. Expectations are "too low"
According to data from S&P Global Market Intelligence, most analysts who follow iRobot stock expect the company will grow its profits at about 15% annually over the next five years. Dougherty begs to differ.
Quoted on StreetInsider.com this morning, Dougherty predicts: "[T]he company's high-teens revenue growth and 20%+ earnings growth [are] sustainable. We also believe that consensus expectations for revenue and earnings for both the current Q4'16 and upcoming 2017 are too low."
3. How low are they?
According to Yahoo! Finance figures, analysts are predicting 77% earnings growth for iRobot in this year's final quarter -- but negative 5% earnings growth for the year as a whole. Next year should see a turnaround, with analysts expecting earnings to surge 31% -- and Dougherty thinks iRobot could do even better than that.
In fact, according to Dougherty, iRobot is likely to achieve 36% earnings growth in 2017, then 26% growth in 2018. The analyst argues the stock should sell for at least 33 times next year's earnings, and 26 times what it expects the stock to earn in 2018, achieving a PEG ratio of 1.0.
The most important thing: History
But is this growth rate likely?
True, iRobot stock notched 39% earnings growth over the course of the past year, despite growing sales only 15%. But S&P Global data show that the company has scored significantly weaker on both sales and earnings growth over the long term. In fact, compounded over the past five years, iRobot's long-term rate of sales growth is an unimpressive 8%, while net earnings growth has been an even weaker 5%.
Speaking of the long term, I have to admit that this is what worries me most about iRobot -- its failure to pan out as an investment despite being given more than a decade to prove itself. After all, I've been writing about this stock for more than a decade. Over that time, iRobot has introduced a number of new versions of its Roomba floor vacuum robot (see above). It's introduced the Scooba floor mopping robot, and its Braava successor. It took a turn for the inventive with Looj, the gutter-cleaning robot, and Verro, its pool cleaner.
Most of those really novel iRobot inventions, however, happened nearly a decade ago. Since then, iRobot has focused primarily on making incremental improvements in its existing product lines -- even as more and more competitors crowded into the market iRobot created. And as I've seen this market evolve, I've begun to wonder if iRobot has squandered its lead. Today, iRobot's Roombas have to compete with rival robots from Samsung, from Neato, and even from Dyson. If iRobot couldn't produce runaway growth when it had no credible competition, I see little reason to believe it will do better now that real competition has arrived.
Long story short: While iRobot could well be worth the stock's current 33 times earnings valuation if it succeeds in hitting Dougherty's targets, the company's history suggests that such earnings growth, even if it happens in the short term, may not be sustainable over the long term.
Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. You can find him on Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he currently ranks No. 314 out of more than 75,000 rated members.
The Motley Fool owns shares of and recommends iRobot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.