"iRobot First-Quarter Financial Results Exceed Expectations."

So wrote iRobot (NASDAQ:IRBT) in the headline for its Q1 2015 earnings release Tuesday, before proceeding to regale investors with its accomplishments:

  • Sales up 3.3% for the quarter, versus year-ago numbers.
  • Net income down 9.4% year over year.
  • Profits per diluted share down 11.1%.
  • Meanwhile, iRobot cut a dime off its top prediction for full-year profit, and now says 2015 earnings per share should fall somewhere between $1.25 and $1.35.

This, according to iRobot, qualifies as "exceeding expectations."

The power of low expectations
And maybe it does -- technically. After all, analysts at Zacks Equity Research, for example, say that iRobot's numbers were all above what it had estimated for the company, pre-earnings. Profits in particular exceeded Zacks' estimates by 45.5%.

Also, gross margins at the company did expand modestly, inching up 20 basis points to 45.5%. And free cash flow was positive in Q1 ($3.3 million), a big improvement over last year's Q1 cash burn of $9.9 million.

So it's not all bad news. But even so, it's hard to avoid the impression that things are not going great at iRobot. While the company boasted of growing Defense & Security sales by 17% in Q1, D&S is by far the less profitable of iRobot's two main business divisions, earning gross margins of just 33.2%. And while management predicts that Home Robots (the more profitable division) will grow sales by "11-13%" this year, it's predicating this estimate on "growth in the United States and China."

To put that in context, international Home Robot sales eked out only a 5% gain in Q1, while domestic Home Robot sales... declined.

Now let's put all of the above in the context of how much iRobot costs. Over the past 12 months, iRobot has earned $37.3 million in net profits, and generated $40.1 million in positive free cash flow. That's a good ratio -- we love it when free cash flow exceeds the "net income" number that Wall Street tends to fixate on.

But even so, these accounting and cash profits leave iRobot stock selling for 26 times earnings today, and more than 24 times free cash flow. So even if management delivers on its promise of "11-13%" in 2015, that seems a pricey valuation. And longer-term, analysts who follow the company are hoping iRobot can achieve and maintain a growth rate of at least 13% -- which again seems too slow to support the P/E ratio.

Long story short? I'd probably rather be short this stock than long.